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WAR  FINAiNCE  CORPORATION 


HEARINGS 

BEFORE  THE 

COMMITTEE  ON  WAYS  AND  MEANS 

JTOUSE  OF  REPRESENTATIVES 

SIXTY-FIFTH  CONGRESS 

SECOND  SESSION 

ON 

H.  R.  9499 

A  BILL  TO  PROVIDE  FOR  THE  NATIONAL  SECURITY  AND 
DEFENSE,  AND,  FOR  THE  PURPOSE  OF  ASSISTING  IN  THE 
PROSECUTION  OF  THE  WAR,  TO  PROVIDE  CREDITS  FOR 
INDUSTRIES  AND  ENTERPRISES  IN  THE  UNITED  STATES 
NECESSARY  OR  CONTRIBUTORY  TO  THE  PROSECUTION  OF 
THE  WAR,  AND  FOR0  OTHER  PURPOSES 


FEBRUARY  18  AND  19,  1918 


WASHINGTON 

GOVERNMENT  PRINTING  OFFICE 
1918 


COMMITTEE  OX  WAYS  AM)  MEANS. 
HOUSE  OF  REPRESENTATIVES. 

SIXTY-FIFTH  CONCRKSS.  SKCOMI  SKSSION. 

CLAUDE  KITCHIX,  North  Carolina,  Chairman. 


HENRY  T.  RAINEY,  Illinois. 

LINCOLN  DIXON.  Indiana. 

CORDELL   HULL,   Tennessee. 

JOHN   N.    GARNER.    Texas. 

JAMES  W.  COLLIER.  Mississippi. 

CLEMENT  C.  DICKINSON.  Missouri. 

WILLIAM  A.  OLDFIELD.  Arkansas. 

CHARLES  R.  CRISP,  Georgia. 

GUY  T.  HELVERING,  Kansas. 

GEORGE  F.  O'SHAUNESSY,  Rhode  Island. 

JOHN  F.  CAREW,  New  York. 

GEORGE  WHITE,  Ohio. 

JOHN  E.  WAI.KEK.  Clerk 
2 


JOSEPH  W.  FORDNEY.  Michigan. 
J.   HAMPTON  MOORE,  Pennsylvania. 
WILLIAM  R.  GREEN,   Iowa. 
CHARLES  H.   SLOAN.  Nebraska. 
NICHOLAS  LONGWORTH,  Ohio. 
GEORGE   W.    FAIRCHILD,    New    York. 
JOHN  A.   STERLING.   Illinois. 
WHITMELL  P.  MARTIN.  Louisiana. 
WILLIS  C.  HAWLEY,  Oregon. 
ALLEN   T.    TREADWAY,    Massachusetts. 


STACK 

ANNEX 

H6- 


WAR  FINANCE  CORPORATION. 


COMMITTEE  ON  WAYS  AND  MEANS, 

HOUSE  OF  REPRESENTATIVES, 
Washington,  Z>.  C.,  February  18,  1918. 

Pursuant  to  notice  the  Committee  on  Ways  and  Means  met  at 
10.30  o'clock  a.  m.,  Hon.  Claude  Kitchin  (chairman)  presiding. 

Present :  The  chairman  and  Messrs.  Rainey,  Dixon,  Hull,  Garner, 
Collier,  Dickinson,  Oldfield,  Crisp,  Helvering,  O'Shaunessy,  White, 
Fordney,  Moore,  Green.  Sloan.  Longworth,  Martin,  Hawley,  and 
Treadway. 

Present  also :  Hon.  W.  G.  McAdoo,  Secretary  of  the  Treasury,  and 
Hon.  Paul  M.  Warburg,  vice  governor  of  the  Federal  Reserve  Board. 

The  CHAIRMAN.  Gentlemen,  while  the  Secretary  of  the  Treasury 
has  made  a  statement  before  the  Finance  Committee  of  the  Senate 
with  respect  to  this  bill,  yet,  no  doubt,  each  Member  has  not  had  an 
opportunity  to  read  that  statement,  and  then  a  great  many  questions 
may  occur  to  the  minds  of  the  Members  of  this  committee  that  did 
not  occur  to  the  minds  of  the  Members  of  the  Senate  committee  and 
upon  which  the  Secretary  was  not  asked  any  questions.  I  have  there- 
fore asked  the  Secretary  to  appear  and  make  a  statement  before  this 
committee  so  that  any  Member  may  ask  any  question  relative  to  the 
bill  and  its  provisions  that  seems  proper  to  him. 

Mr.  Secretary,  I  am  going  to  ask  you  just  one  broad  question: 
Will  you  please  state  the  mam  purposes  of  this  proposed  legislation 
and  the  main  reasons  to  your  mind  that  make  this  legislation 
necessary  ? 

STATEMENT  OF  HON.  WILLIAM  G.  McADOO,  SECRETARY  OF  THE 

TREASURY. 

Secretary  McAnoo.  The  proposed  act  to  incorporate  a  War  Finance 
Corporation  should  be  regarded  primarily  as  a  measure  to  enable 
the  banks,  both  national  banks  and  State  banks  and  trust  companies, 
to  continue  to  furnish  essential  credits  for  industries  and  enterprises 
which  are  necessary  or  contributory  to  the  prosecution  of  the  war. 

The  Government's  borrowings,  particularly  during  the  period  im- 
mediately preceding  and  following  each  Liberty  loan,  have  tended  to 
preempt  the  credit  facilities  of  the  banks  and  often  to  prevent  them 
from  giving  needed  and  customary  help  to  quasi-public  and  private 
enterprises.  Many  instances  have  been  brought  to  the  attention  of 
the  Secretary  of  the  Treasury  and  of  the  Federal  Reserve  Board 
where  industrial  plants,  public  utilities,  power  plants,  railroads,  and 

3 


4  \\.\K    FINANCE    CORPORATION. 

others  have  found  it  difficult,  if  not  impossible,  to  obtain  the  neces- 
sary advances  to  enable  them  to  perform  vital  service  in  connection 
with  the  war  because  essential  credits,  ordinarily  available  to  them, 
are  being  absorbed  by  the  Government  itself. 

In  Europe  central  banks  are  permitted  to  grant  to  banks  and  bank- 
ers loans  upon  stocks  and  'bonds  upon  certain  well-defined  terms. 

I  would  like  to  direct  your  particular  attention  to  that  statement 
because  that  indicates  the  fundamental  purpose  of  this  bill.  In 
Europe,  I  wish  to  repeat,  central  banks,  which  correspond  to  our 
Federal  reserve  banks  in  a  sense,  are  permitted  to  "-rant  to  banks 
and  bankers  loans  upon  stocks  and  bonds  upon  certain  well-defined 
terms.  But  here  the  Federal  reserve  banks  arc  not  permitted  to  do 
that,  the  Federal  Reserve  Act  having:  specifically  contemplated  ad- 
vances of  that  character  only  upon  what  we  call  liquid  or  com- 
mercial paper,  and  therefore  the  Federal  reserve  banks  aiv  not  per- 
mitted to  rediscount  any  paper  for  other  banks  which  is  secured  by 
fixed  investments. 

The  Federal  Reserve  Act  does  not  provide  for  these  and  the  War- 
Finance  Corporation  is  designed  as  a  war  emergency  to  fill  this  gap. 
The  provisions  of  the  Federal  Reserve  Act  which  permit  Federal 
Reserve  banks  to  rediscount  and  purchase  commercial  paper  and 
paper  secured  by  the  Government's  obligations  have  had  the  effect  of 
forcing  the  banks  to  discriminate  against  loans  on  ineligible  paper, 
even  where  such  loans  were  vitally  necessary  for  war  purposes,  in 
favor  of  loans  on  commercial  paper  even  where  they  represented 
activities  or  enterprises  not  related  to  the  war  and  which  might  well 
be  curtailed  during  the  period  of  the  war.  It  is  believed  that  the 
proposed  bill  has  been  wisely  and  conservatively  conceived  as  a  war 
measure  to  give  relief  from  this  condition  during  the  war.  The 
banks  of  the  country  would,  no  doubt,  scrutinize  with  the  utmost  can- 
both  the  loans  themselves  and  the  security  therefor  and  would  exercise 
their  individual  judgment  upon  the  borrower's  credit  before  assuming 
a  liability  for  the  amount  of  the  loan,  and  also  because  they  would  be 
under  the  necessity  of  advancing,  out  of  their  own  resources.  -25  per 
cent  of  the  amount  loaned.  The  bill  would  authorize  advances  to  a 
bank  of  only  75  per  cent  of  the  amount  loaned  by  the  bank  on  the 
notes  or  obligations  of  persons,  firms,  or  corporations  whose  activities 
are  necessary  or  contributory  to  the  war. 

The  bill  contemplates  that  the  War  Finance  Corporation  shall  lend 
money  to  banks,  both  National  and  State,  which  are  making  loans  to 
enterprises  conducted  by  persons,  firms,  or  corporations  producing 
materials  or  supplies,  or  doing  anything  else  which  is  necessary  for 
or  contributory  to  the  war.  If  a  bank,  for  instance,  should  loan 
money,  we  will  say,  to  a  munitions  company  and  take  the  company's 
six  months'  note  with  the  company's  bond  as  collateral  security,  that 
note  would  not  be  eligible  for  rediscount  in  the  Federal  Reserve 
banks;  but  the  War  Finance  Corporation  in  such  circumstances  could 
advance  to  the  bank  against  the  note  of  the  munitions  companv.  so 
secured  with  that  bank's  indorsement  on  it.  75  per  cent  of  the  face 
of  that  note. 

The  provision  of  the  bill  permitting  direct  loans  by  the  corpora- 
tion in  exceptional  cases  is  intended  to  provide  for  those  rare  in- 
stances where  it  may  be  made  to  appear  to  the  corporation  that  a 


WAR   FINANCE    CORPORATION.  5 

meritorious  borrower  is  being  unwisely  discriminated  against  by  the 
banks. 

You  will  understand  that  direct  loans  are  permitted  under  the 
terms  of  this  bill,  only  in  exceptional  cases. 

As  a  corollary  to  the  provision  for  the  extension  of  credits  the  bill 
provides  for  approval  by  the  corporation,  through  a  system  of 
licenses,  of  issues  of  securities  with  a  view  to  preventing  the  use  of 
capital  in  unnecessary  expenditures  during  the  period  of  the  war. 

It  is  important  that  appropriate  provision  be  made  by  law,  so  that, 
for  the  duration  of  the  war.  funds  available  for  investment  in  securi- 
ties shall  be  eft'ectivel}T  and  economically  used  to  supply  the  financial 
requirements  of  the  Government  and  of  those  industries  whose  opera- 
tion-! are  necessary  or  contributory  to  the  war.  The  ordinary  flow  of 
<  ii]r.t  il,  which  in  normal  times  is  left  free  to  seek  its  own  investment, 
should  during  the  war  be  so  directed  and  conserved  that  these  require- 
ments shall  be  taken  care  of  before  funds  shall  be  invested  either  in 
new  enterprises  or  for  the  expansion  of  such  old  enterprises  as  are 
not  necessary  or  contributory  to  the  prosecution  of  the  \v;ar.  In  these 
critical  times  funds  available  for  investment  must  not  be  dissipated  on 
miscellaneous  capital  expenditures  which,  however  useful  or  desirable 
in  normal  times,  will  not  now  aid  in  the  success  of  the  war.  It  is  not 
so  much  a  question  of  money  as  a  question  of  labor  and  materials. 
It  is  essential  that  the  demand  for  labor  and  materials  for  industries 
which  are  not  contributory  to  the  prosecution  of  the  Avar  should  be 
kept  within  bounds,  so  that  the  Avar  needs  shall  be  first  provided  for. 
The  test  must  be  whether  the  proposed  expenditure  will  strengthen 
the  industrial  and  military  structure  of  the  country  for  the  purposes 
of  the  Avar. 

The  Secretary  of  the  Treasury  has  already  asked  the  voluntary 
submission  to  the  Federal  Reserve  Board  of  any  projected  capital 
issues  and  has  asked  the  Federal  Reserve  Board  to  pass  upon  such 
issues.  The  Federal  Reserve  Board  is  already  performing  this  pa- 
triotic service.  The  work  which  the  board  has  undertaken  along 
these  lines  should  be  regarded  as  preliminary  and  as  laying  the  basis 
and  furnishing  in  no  small  part  the  organization  for  the  work  AAThich 
the  corporation  will  have  to  do.  While  patriotic  business  men  and 
bankers  have  in  many  instances  voluntarily  submitted  the  question 
whether  the  particular  security  issue  then  contemplated  Avill  be  in  any 
way  helpful  to  the  prosecution  of  the  Avar,  it  is  certainly  not  desirable 
that  matters  of  such  great  importance  should  be  left  upon  a  purely 
voluntary  basis.  These  questions  should  be  dealt  with  systematically 
under  authority  of  Congress.  The  thoughtful  and  patriotic  citizen 
Avho  voluntarily  submits  his  plans  to  the  Government  should  not  be 
placed  at  a  disadvantage  with  his  less  thoughtful  or  less  scrupulous 
fellow  citizen  who  goes  ahead  Avith  his  private  affairs  without  refer- 
ence to  the  war  needs  of  his  country. 

The  proposed  license  system  for  security  issues  is  in  line  Avith  the 
act  which  established  the  selectiA'e  draft  in  lieu  of  a  A*oluntary  system 
of  creating  an  army.  The  sacrifices  which  must  be  made  if  the  war 
is  to  be  won  should  be  made  by  all  alike  and  not  merely  by  those 
whose  patriotism  impels  them  to  volunteer  and  who  Avould  have  to 
carry  the  entire  burden  unless  the  slackers  are  compelled  to  do  their 
part. 


D  WAR    F.1XAXCE    COKPOKATION. 

The  bill  has  been  flrawn  with  the  double  purpose  of  restricting 
unnecessary  capital  expenditures  and  of  providing  facilities  for  aid- 
ing those  industries  whose  operations  are  necessary  or  contributory 
to  the  prosecution  of  the  war.  Broadly  speaking  all  these  are  "  war 
industries."  The  bill  is  purely  a  war  measure:  designed  to  conserve 
the  supply  of  labor  and  materials  for  the  purposes  of  the  war,  and 
to  help  supply  the  war's  financial  requirements,  and  to  give  them  a 
first  claim  on  capital  seeking  investment  in  like  manner  as  the  war's 
material  requirements  have  been  given  a  first  claim  on  production. 
By  the  term  "  war  industries  "  is  meant  not  only  those  industries 
turning  out  the  actual  munitions  of  war  but  also  all  those  supplying 
any  of  the  other  elements  of  production  or  distribution  in  an  indus- 
trial structure  designed  to  meet  the  diversified  requirements  of  the 
war.  The  bill  is  not  intended  to  interfere  with  the  continued  exist- 
ence and  operation  of  existing  industries,  even  though  not  remotely 
contributory  to  the  prosecution  of  the  war.  Such  industries  should 
not.  however,  be  permitted  to  assert  a  first  claim  on  fresh  capital  or 
be  considered  until  the  requirements  of  the  Government  and  of  the 
"  war  industries  "  have  been  fully  met. 

The  proposed  bill  creates  the  War  Finance  Corporation,  to  regu- 
late the  sale  of  new  issues  of  securities,  and  to  make  loans  of  its  funds 
or  its  credit  in  aid  of  "  war  industries."  It  prohibits  any  person, 
firm,  corporation,  or  association  from  selling  or  offering  for  sale  any 
securities  issued  after  the  date  of  the  approval  of  the  act  unless  a 
license  for  such  sale  or  offering  (if  required  by  the  corporation)  shall 
have  been  obtained  from  the  corporation.  Through  its  regulation  of 
security  issues  the  corporation  will  be  able  to  keep  the  field  some- 
what clear  for  the  borrowing  operations  of  the  Government,  and  at 
the  same  time  will  stand  ready  and  able  to  aid  "  war  industries  " 
whose  financial  requirements  may  be  rendered  difficult  if  not  impos- 
sible to  meet  in  competition  with  Government  loans.  This  regula- 
tion of  security  issues  will  also  tend -to  prevent  the  further  diversion 
of  labor  and  materials  into  nonessential  industries. 

The  entry  of  the  United  States  into  the  European  war  imme- 
diately necessitated  a  vast  increase  in  the  country's  production  of 
material,  which  in  turn  necessitated  an  increase  in  the  machinery  of 
production  and  corresponding  enlargement  of  land  and  water  trans- 
portation facilities.  Xo  such  enlarged  demand  could  be  met  without 
increased  demands  upon  the  banks  for  commercial  credits  to  pro- 
duce the  goods  required  and  upon  capital  both  for  enlarging  the  ma- 
chinery employed  by  our  industries  and  for  developing  railroad  fa- 
cilities, for  building  ships,  and  for  other  purposes.  Fortunately 
the  establishment  of  the  Federal  Reserve  System  had  already  pro- 
vided the  means  through  which  the  financing  of  the  greater  com- 
mercial turnover  could  be  largely  taken  care  of,  and  this  has  been 
supplemented  by  the  Government's  policy  of  making  advances 
through  the  War  Credits  Board  of  the  War  Department  to  manu- 
facturers upon  work  in  process  for  the  Government.  I  do  not  re- 
gard advances  of  this  character  with  favor  as  it  tends  to  force  upon 
the  overburdened  Treasury  the  load  of  financing  private  enterprises 
through  the  indirect  medium  of  the  War  Department,  when  such 
transactions  ought  to  be  made  through  the  banks.  If  the  banks 
are  unable  to  meet  such  demands,  then  the  War  Finance  Corpora- 


WAR    FINANCE    CORPORATION.  7 

tion  can  do  so  and  relieve  the  strain  now  unwisely  imposed  directly 
upon  the  Treasury. 

Permit  me  to  say  in  connection  with  that  statement  about  the 
advances  now  being  made  through  the  War  Department  that  I  am 
not  criticizing  the  act  which  authorizes  that  to  be  done.  The  War 
Department,  as  you  know,  and  I  think  also  the  Xavy  Department, 
has  the  right  to  make  advances  on  Government  contracts  of  not  ex- 
ceeding 30  per  cent,  at  the  discretion  of  the  heads  of  those  depart- 
ments. 

We  find  that  contracts  are  made,  and  that  the  departments  have 
the  power  to  make  these  advances  to  the  contractor,  without  con- 
sulting the  Treasury  at  all.  They  do  not  have  to  consult  the 
Treasury  under  the  law.  They  do  not  decline  to  consult  the 
Treasury,  but  everybody  is  very  busy,  and  they  proceed  under  au- 
thority of  law  and  make  these  contracts  from  their  own  particular 
Standpoints  upon  the  assumption  that  the  Treasury  is  ready  to 
meet  any  strain  that  may  be  put  upon  it.  AVe  are  now  trying 
to  work  out  a  plan  for  consultation  Avith  the  other  departments, 
and  there  is  a  thorough  disposition  on  their  part  to  consult  with 
the  Treasury  and  to  cooperate  with  respect  to  such  advances,  so 
that  they  will  not  be  made  Avithout  our  knoAvledge  and  so  that 
unusual  demands  will  not  come  upon  the  Treasury  without  notice. 
But  I  think  the  practice  is  bad.  because  these  contractors  are  only 
too  Avilling  to  get  advances  from  the  Go\rernment  at  a  loAver  rate  of 
interest  than  they  are  really  entitled  to  from  the  commercial  stand- 
point. In  this  indirect  way  these  contractors  diA*ert  to  the  Treasury 
financial  transactions  that  ought  to  be  conducted  through  the  banks, 
and  would  ordinarily  be  conducted  through  the  banks. 

Xo\v.  if  the  banks  are  unable  to  finance  those  demands,  this  Finance 
Corporation  could  step  into  the  breach  and  finance  the  demands  upon 
a  character  of  security  that  a  commercial  bank  might  not  like  to 
take.  Even  though  the  banks  may  not  noAv  be  in  position  to  do  this 
financing,  after  the  AA'ar  Finance  Corporation  has  been  established 
they  could  A'ery  properly  do  it  because  the  AA7ar  Finance  Corporation 
could  ahvays  come  to  their  relief  and  take  paper  \vhich  would  be 
unavailable  for  rediscount  in  Federal  reserA'e  banks. 

The  money  required  for  increased  facilities  for  ocean  transporta- 
tion has  been  provided  by  act  of  Congress.  Provision  for  at  least  a 
pai't  of  the  money  required  for  enlarging  railroad  transportation 
facilities  is  contemplated  in  legislation  noAv  pending  in  Congress. 

The  necessary  increase,  hoAvever,  in  machinery  to  produce  goods, 
which  requires  the  investment  of  capital  in  industrial  enterprises, 
not  only  has  not  been  provided,  but  a  considerable  restriction  has 
been  imposed  upon  the  usual  supply  of  capital  for  investment,  partly 
by  reason  t>f  the  investment  market  having  been  preempted  by  the 
Government  through  the  issue  of  its  own  bonds  and  partly  because 
of  the  natural  tendency  of  investors  Avho.  notAvithstanding  that  they 
have  money  to  inA^est.  hesitate  to  do  so  on  account  of  the  uncertainties, 
of  war. 

The  situation  with  which  the  country  is  confronted,  therefore,. 
seems  to  require  the  imposition  of  reasonable  restrictions  upon  the 
inA'fstment  of  capital  in  industries  and  production  not  essential  for 
the  conduct  of  the  war.  It  is  equally  important  that  there  shall  be 


WAR    FIXAXCE    CORPORATION. 

some  means  of  supplying  necessary  capital  to  the  industries  which 
are  essential  to  the  production  of  war  materials  and  of^those  tilings 
which  indirectly  contribute  to  the  efficiency  of  the  Nation.  The 
restriction  of  unnecessary  capital  expenditures  will  relieve  the  mar- 
ket of  demands  which  now  interfere  not  onlv  with  the  direct  finan- 
cial requirements  of  the  Government,  but  which  make  it  difficult  for 
those  who  are  furnishing  the  Government  and  the  people  with  essen- 
tial goods  to  obtain  the  capital  necessary  to  increase  their  production. 

The  license  system  proposed  is  peculiarly  applicable  to  a  country 
of  the  great  size  of  the  United  States,  where  banking  and  credit 
transactions  are  conducted  by  a  vast  number  of  independent  banks 
and  private  banking  firms. 

The  combined  operation  of  the  two  functions  of  the  corporations — 
that  is,  the  extension  of  credit  and  licensing — will  make  the  exercise 
of  supervision  and  regulation  by  the  corporation  much  more  effective 
in  putting  the  productive  activities  of  the  country  on  a  war  basis 
than  would  be  the  case  were  the  Government  simply  to  make  ad- 
vances without  at  the  same  time  exercising  supervision  and  control 
of  security  issues. 

In  so  far  as  the  corporation  may  be  called  upon  to  make  advances 
to  banks,  its  first  concern  would  naturally  be  to  aid  those  for  which 
other  instrumentalities  of  relief  have  not  already  been  provided: 
for  example,  savings  banks,  and  particularly  mutual  savings  banks, 
which  are  without  capital  stock  and  which  are  not  operated  for  the 
profit  of  stockholders.  As  a  class  these  institutions  are  not  members 
of  the  Federal  Reserve  System  nor  are  most  of  them  eligible  for 
membership.  Their  investments  consist  for  the  most  part  of  the 
securities  of  the  United  States  and  of  States  and  municipalities  and 
of  the  bonds  of  industrial,  transportation,  and  utility  companies,  and 
also  mortgages. 

Nothing  will  tend  so  greatly  to  prevent  the  development  of  a  in- 
possible  uneasiness  among  savings  bank  depositors  as  the  assurance 
provided  by  this  act  that  any  solvent  savings  bank  in  case  of  sudden 
withdrawals  can  obtain  advances  upon  the  security  of  its  invest- 
ments and  promptly  liquidate  the  claims  of  its  depositors.  There 
is  considerable  apprehension  among  savings  banks  as  to  means  of 
relief  if  an  emergency  arises,  but  I  believe  that  the  assurances  of 
support  which  this  \Var  Finance  Corporation  will  provide  will  allay 
all  apprehension  and  probably  head  off  any  demand  for  withdrawals. 
of  deposits. 

The  next  concern  of  the  corporation  would  be  the  requirements  of 
commercial  banks,  which  are  unable  to  get  required  accommodation 
upon  the  security  of  their  investments  through  the  Federal  reserve 
banks.  Many  banks  which  are  now  called  upon  to  extend  large 
lines  of  credit  to  customers  which  are  expanding  their  businesses  to 
meet  the  present  needs  of  the  Government  are  obliged  to  take  se- 
curities from  these  customers  which  are  not  eligible  for  rediscount  at 
Federal  reserve  banks.  At  the  same  time  these  banks  are  being  called 
upon  to  extend  larger  lines  of  credit  to  their  customers  than  ever  be- 
fore. Their  customers  are  calling  upon  them  not  only  for  commercial 
loans  to  carry  their  large  inventories,  but  for  what  are  in  effect  tem- 
porary capital  loan.-  in  order  to  construct  new  facilities  and  add 
machinery  to  existing  plants  for  the  purpose  of  filling  Government 
contracts.  The  bur-leu  of  these  banks  is  also  heavily  increased  bv  the 


WAR    FINANCE    CORPORATION. 

financial  requirements  of  the  Government,  which  at  the  same  time 
is  calling  upon  them  to  lend  large  sums  through  sales  of  Treasury 
certificates  of  indebtedness. 

I  may  add  just  here,  gentlemen,  that  in  order  to  carry  the  burden 
' ,ver  the  interval  between  Liberty  loans,  I  have  just  called  upon  the 
banks  of  the  United  States  to  contribute,  pro  rata  of  their  resources, 
to  the  purchase  of  temporary  certificates  of  indebtedness  issued  by  the 
Treasury,  and  if  they  should  all  respond  to  that  it  will  absorb  tem- 
porarily about  10  per  cent  of  the  resources  of  the  banks  of  the 
United  States.  We  have  got  to  secure  from  them  approximately 
^.000.000.000  on  short-term  Treasury  certificates  in  order  to  carry 
the  next  Liberty  loan  over  to  a  period  when  I  think  it  would  be  wise 
to  offer  it  to  the  country.  One  of  the  reasons  why  it  is  necessary  is 
that  until  the  railroad  legislation  is  out  of  the  way  so  that  the  status 
of  railroad  investments  is  fixed  in  the  country  and  the  stabilizing 
effects  of  that  are  felt,  and  until  this  War  Finance  Corporation  legis- 
lation can  be  acted  upon  so  that  the  banks  themselves  will  know  what 
resources  they  will  have  if  they  undertake  to  finance  capital  expendi- 
tures of  this  character,  the  soil  will  not  be  ready  for  undertaking 
another  Liberty  loan. 

In  these  circumstances  the  commercial  banks  are  quite  naturally 
discriminating  in  their  loans  between  those  eligible  for  rediscount 
by  Federal  reserve  banks  and  those  which  are  not.  The  proposed  act, 
however,  would  remove  the  ground  for  any  such  discrimination,  for 
it  provides  a  means  by  which  such  banks  mav  procure  accommoda- 
tion upon  certain  securities  arising  out  of  war  conditions  which  are 
not  eligible  at  Federal  reserve  banks.  The  proposed  act  would  thus 
free  credit  pressingly  needed  at  the  present  time,  both  directly  and 
indirectly,  for  the  Government's  use. 

I  shall  give  one  or  two  illustrations  of  pressing  needs  which  it  is 
hoped  that  the  War  Finance  Corporation  mav  be  able  to  meet.  It 
is  not  necessary  to  multiply  examples,  as  everyone  at  all  familiar 
with  existing  industrial  and  financial  conditions  will  be  able  to  sup- 
plv  other  illustrations  from  his  own  knowledge. 

There  has  been  called  to  mv  attention  the  case  of  an  important  and 
successful  power  company  whose  business  is  showing  substantial  in- 
creases, and  whose  power  is  consumed  largely  in  war  industries.  It 
has  recently  made  a  public  offering  of  its  securities.  The  nroceeds 
of  the  securities  were  to  be  used  in  part  to  pav  maturing  obligations 
and  in  part  for  needed  extensions  to  plant.  The  capital-issues  com- 
mittee of  the  Federal  Reserve  Board  had  determined  this  issue  to 
be  compatible  with  the  national  interest.  After  a  public  offering  in 
the  usual  Avay,  less  than  20  per  cent  of  the  entire  amount  was  sold, 
and  most  of  these  sales  were  made  to  persons  whose  prior  investments 
in  the  company's  securities  made  it  desirable  that  the  issue  should  lie 
a  success.  This  is  only  one  illustration  of  the  difficulties  with  which 
even  the  most  successful  industries  having  maturing  obligations  or 
pressing  capital  requirements  are  confronted. 

Another  instance  will  show  the  importance  of  dealing  with  this 
matter  promptly.  A  power  company  operating  in  central  Pennsyl- 
vania is  under  insistent  demands  for  power  for  the  operation  of  coal 
mines,  approximately  80  per  cent  of  its  power  being  utilized  for  that 
purpose.  Under  ordinary  conditions,  it  was  stated  by  one  of  its 


10  \VA!{    F1XANCE    CORPORATION. 

officers,  the  company  would  >cll  at  the  present  time  about  si, 500.000 
of  securities  for  the  purpose  of  completing  necessary  extensions  and 
construction  work.  Being  unable  to  do  so,  the  company  is  borrowing 
about  $500,000  on  short  loans  from  small  local  banks  throughout  its 
territory.  A  demand  on  the  part  of  a  few  of  these  banks  for  repayment 
of  loan-  <•<  uld  not  possibly  be  met,  and  not  only  would  extension  work 
cease  but  the  company  might  face  a  receivership.  Relief  in  this  sort 
of  case,  in  view  of  the  urgent  necessity  for  an  enlarged  production  of 
coal,  is  of  vital  importance. 

A  similar  situation  in  Michigan  has  been  called  to  my  attention  : 
A  public-utility  corporation  has  $5,000,000  of  notes  maturing,  all 
having  been  issued  for  construction  purposes.  This  company  is  now 
borrowing  over  $5.000,000  in  short  loans  from  different  banks. 
There  is  an  insistent  demand  from  the  industries  of  ihat  section  for 
more  power  for  manufacturing  purposes,  which  the  company  is 
unable  to  meet  because  of  lack  of  adequate  capital  and  because  of 
the  uncertainty  of  its  position  with  su"h  a  large  floating  debt. 

The  necessary  restriction  of  passenger  transportation  by  the  steam 
railroads  during  the  present  period  of  congestion  will  throw  greater 
burdens  upon  urban  and  interurban  railroad  lines,  which  will  there- 
fore require  for  their  operation  a  greater  amount  of  electric  power 
and  doubtless  some  extension  of  their  facilities.  In  some  cases,  no 
doubt,  enlargement  of  their  facilities  is  directly  required  for  the 
Government's  service  at  the  various  Army  encampments.  Borrow- 
ings for  such  purposes  are  not  eligible  for  rediscount  with  Federal 
reserve  banks,  and  necessary  provision  must  be  made  for  the  develop- 
ment of  such  lines. 

.V  very  large  part  of  the  manufactures  of  the  country  are  conducted 
by  the  use  of  electric  energy,  for  which  the  demand  in  some  parts  of 
the  country  necessitates  immediate  enlargement  of  production  by 
both  steam  and  hydroelectric  power.  Indeed,  I  am  informed  that 
in  some  important  industrial  districts  there  exists  a  distinct  shortage 
of  electric  power,  which  is  badly  needed  for  war  industries.  If  this 
deficiency  is  to  be  supplied,  additional  facilities  must  be  procured, 
and  money  is  urgently  needed  for  the  necessary  capital  expenditures. 
Existing  financial  conditions  are  such  that  power  companies  find 
themselves  unable  to  procure  these  funds  on  reasonable  terms.  That 
these  funds  should  be  obtained  to  produce  the  power  needed  for  our 
war  industries  is  a  matter  of  prime  importance,  and  yet.  at  the  pres- 
ent time  it  is  difficult,  if  not  impossible,  to  obtain  these  funds  through 
the  ordinary  channels. 

Since  the  publication  of  the  terms  of  the  proposed  act  some  criti- 
cism has  appeared  indicating  a  belief  that  the  operation  of  the  cor- 
poration may  produce  expansion,  or.  as  some  term  it.  inflation,  of  a 
dangerous  nature. 

In  my  opinion  the  existence  of  this  corporation  and  the  intelligent 
exercise  of  its' functions  will  do  more  to  prevent  unsafe  expansion 
than  any  other  course  which  could  now  be  pursued,  for  it  must  be 
remembered  that  the  investment  markets  are  practically  closed  to  the 
country's  industries,  including  public-utility  corporations  and  the 
railroads.  These  essential  industries  and  transportation  companies 
in  these  circumstances,  in  the  absence  of  some  such  plan  as  is  pre- 
sented in  this  bill,  are  obliged  to  look  to  the  banks  for  the  means  not 
only  of  continuing  their  normal  business  but  of  enlarging  it  for  war 


WAR    FINANCE    CORPORATION.  11 

purposes.  The  needs  of  these  corporations,  which  sound  finance 
would  require  to  be  provided  for  in  the  form  of  capital  loans,  must 
now  increasingly  be  taken  care  of  in  the  form  of  bank  loans.  The 
burden  placed  upon  the  banks  to  meet  the  demands  of  this  class  of 
borrowers  can  only  be  met  if  these  banks  use  the  facilities  of  the 
Federal  reserve  banks  by  discounting  such  eligible  paper  as  they  may 
have  in  their  portfolios.  The  continuance  of  this  process  of  looking 
more  and  more  to  the  banks  for  short  loans  of  funds  which  should  be 
provided  as  capital  by  investors  is  the  quickest  way  to  bring  about  an 
unsound  expansion  of  bank  credits.  If  this  burden,  through  the 
instrumentality  of  the  War  Finance  Corporation,  can  be  removed 
from  the  banks,  and  if  investors  can  be  induced  to  furnish  necessary 
capital,  that  kind  of  expansion  will  be  checked. 

The  intervention  of  a  corporation  of  this  character,  with  its  large 
capital,  will  provide  the  class  of  security  which  will  appeal  to  the 
minds  of  even  the  most  timid  investors  and  will  naturally  assist  in 
converting  what  might  become  a  dangerous  bank  expansion  into  a 
legitimate  investment  of  free  capital.  Even  though  the  corporation 
were  not  called  upon  to  make  any  considerable  advances  itself,  so 
that  the  issue  of  its  own  securities  to  a  large  extent  might  not  be 
required,  it  has  been  the  experience  in  Great  Britain,  and  I  believe  it 
will  be  our  experience  also,  that  the  restraint  imposed  upon  unneces- 
sary capital  borrowings,  through  Government  intervention  such  as  is 
proposed,  not  only  allays  the  fears  of  timid  investors  but  stimulates 
a  demand  generally  for  issues  of  licensed  securities.  Such  securities 
sell  promptly,  and  their  distribution  is  general  and  effective.  This 
again  provides  a  check  to  unwise  expansion  of  bank  credits. 

The  functions  of  the  corporation  are  intimately  connected  with 
Government  finance,  and  are,  therefore,  within  the  peculiar  province 
of  the  Treasury  Department.  The  War  Finance  Corporation  is  an 
administrative  device  for  exercising  governmental  regulation  of  se- 
curity issues  during  the  war  and  for  utilizing  for  war  purposes  the 
revolving  credit  created  from  the  proceeds  of  its  capital  stock  and 
other  securities.  As  the  operations  of  the  corporation  must  be  har- 
monized with  the  financial  operations  and  policy  of  the  Government 
itself,  the  proposed  bill  provides  that  the  Secretary  of  the  Treasury 
shall  be  a  director  and  chairman  of  the  board  of  directors  and  im- 
poses upon  him  certain  other  duties  in  connection  with  the  corpora- 
tion. A  somewhat  fuller  statement  of  the  functions  and  operations 
of  the  corporation  is  given  below  under  the  appropriate  section  num- 
bers of  the  act. 

SECTION  i. 

For  the  purposes  outlined  above,  the  Secretary  of  the  Treasury 
and  four  additional  persons,  to  be  appointed  by  the  Secretary  of  the 
Treasury,  with  the  approval  of  the  President,  are  created  a  corpora- 
tion, under  the  name  of  the  "  War  Finance  Corporation." 

The  Secretary  of  the  Treasury  and  these  same  four  persons  will 
constitute  the  original  board  of  directors.  The  life  of  the  corpora- 
tion, by  the  terms  of  the  bill,  is  limited  to  10  years,  but  its  powers 
are  to  cease,  except  such  as  may  be  necessary  to  its  successful  liquida- 
tion, six  months  after  the  termination  of  the  war. 


12  WAR    FINANCE    CORPORATION. 

SECTION    2. 

The  capital  stock  of  the  corporation  is  fixed  at  $500,000,000.  all  of 
which  is  to  be  subscribed  by  the  United  States,  and  for  that  purpose 
an  appropriation  of  a  like  amount  is  made.  Payments  upon  this  sub- 
scription will  be  called  only  when  three-fifths  of  the  board  of 
directors  shall  so  determine.  The  capital  stock  was  fixed  at  thi> 
amount  to  provide  the  corporation  with  substantial  resources  with 
which  to  aid  "war  industries'"  and  to  furnish  an  additional  equity 
for  any  other  securities  issued  by  the  corporation. 

SECTION    3. 

The  management  of  the  corporation  is  vested  in  a  board  of  direc- 
tors, constituted  as  stated  above.  The  directors  are  to  serve  for  four 
years:  and  provision  is  made  in  the  following  section  for  rotation  in 
office,  so  that  two  directors  shall  retire  every  two  years.  The  power 
of  removal  is  vested  in  the  Secretary  of  the  Treasury,  with  the  ap- 
proval of  the  President. 

In  connection  with  that  provision  I  wish  to  say  this:  I  under- 
stand there  has  been  some  criticism  of  the  powers  conferred  upon  the 
Secretary  of  the  Treasury  in  this  bill.  The  policies  of  this  corpora- 
tion and  its  operation  must  be  integrated  and  articulated  absolutely 
with  the  Treasury  if  it  is  to  perform  the  functions  which  it  ought  to 
perform,  just  as  much  so  as  the  functions  of  the  Treasury  must  be 
articulated  through  the  Secretary  and  the  Assistant  Secretaries.  As 
a  matter  of  fact,  all  we  are  now  proposing  to  have  done  could  be  done 
through  the  ordinary  Treasury  machinery  if  we  could  use  the  Treas- 
ury of  the  United  States  to  issue  obligations  or  bonds  of  the  char- 
acter proposed  by  this  bill:  but,  of  course,  the  Government  of  the 
United  States  can  not  conveniently  engage  directly  through  the 
Treasury  in  this  form  of  security  issues.  The  bill  creates  a  corpora- 
tion of  a  character  which  may  take  collateral  securities  for  loans  and 
obligations  indorsed  by  the  banks,  which  the  Treasury  should  not 
do.  Therefore  the  Secretary  of  the  Treasury  should  be  put  as  nearly 
as  it  is  possible  to  put  him  in  the  same  relative  position  with  regard 
to  the  management  of  this  corporation  that  he  holds  with  respect 
to  the  management  of  the  Treasury  through  the  Assistant  Secre- 
taries: naturally,  however,  he  -would  not  have  such  power  over  these 
directors  as  he  would  have  over  the  Assistant  Secretaries  of  the 
Treasury,  but  we  ought  to  approach  that  situation  as  nearly  as  pos- 
sible in  order  to  insure  an  absolutely  harmonious  cooperation  of  this 
corporation,  and  coordination  of  its  operations  and  policies,  with 
those  of  the  Treasury  Department.  That  is  the  reason  the  bill  is 
framed  in  this  way. 

SECTION    4. 

The  corporation  is  authorized  to  establish  branch  offices,  though 
the  principal  office  is  required  to  be  located  in  the  District  of  Co- 
lumbia. 

That  is  done  so  that  the  corporation  may  be  reached  at  different 
points  throughout  the  country  without  requiring  everything  to  be 
sent  to  Washington.  My  idea  is  that  the  Federal  reserve  banks. 


WAR    FINANCE    CORPORATION.  13 

which  are  the  fiscal  agencies  of  the  Government,  are  a  very  useful 
nucleus  for  that  organization,  the  Federad  reserve  banks  with  their 
branches. 

And  I  may  say  further  in  this  connection  that  the  purpose  of 
this  bill  is  to  employ  the  very  excellent  organization  already  estab- 
lished by  the  Federal  Reserve  Board  at  my  request  through  their  capi- 
tal issues  committee,  of  which  Mr.  Wai-burg,  the  vice  governor  of  the 
Federal  Reserve  Board,  is  chairman,  and  which  has  been  establishing 
agencies  of  this  character  throughout  the  country  for  the  purpose  of 
passing  upon  these  capital-issue  applications.  The  machinery  thus 
provided  is  being  perfected  all  the  time,  and  will  be  in  shape  to  come 
directly  under  the  operations  of  this  corporation  and  to  perform  that 
function  for  it.  It  has  been  stated  to  the  Senate  committee  that  if 
it  should  be  desired  to  put  a  specific  provision  in  the  bill  that  this 
licensing  feature  should  be  administered  by  a  committee  composed 
of  three  members  of  the  Federal  Reserve  Board,  as  the  present  com- 
mittee is  composed,  and  of  three  additional  competent  men  to  be 
chosen  for  that  purpose.  I  have  no  objection  to  that.  As  a  matter  of 
fact.  I  think  it  would  be  a  very  excellent  way  of  dealing  with  the 
licensing  feature  of  the  bill. 

SECTION  .-,. 

Following  the  analogy  of  the  Federal  Reserve  Board,  no  officer  or 
director  of  the  corporation  is  permitted  to  continue  to  be  a  member 
of  the  board  of  directors  of  any  other  corporation  or  a  member  of 
any  banking  firm. 

I  am  frank  to  say  with  respect  to  this  provision  that  I  am  not  sure 
fhat  we  ought  to  make  such  a  severe  restriction.  I  put  it  in  because 
some  people  are  sensitive  about  these  matters;  but  as  this  is  an 
emergency  measure,  perhaps  we  ought  not  to  require  men  of  ability 
to  give  up  every  interest  they  have  to  come  and  serve  temporarily  in 
an  organization  of  this  kind. 

That  might  be  liberalized  if.  in  the  judgment  of  the  committee,  it 
is  wise  to  do  so. 

The  bill  specifically  provides,  however,  that  this  requirement  shall 
not  prevent  the  appointment  of  any  member  of  the  Federal  Reserve 
Board  or  of  any  other  governmental  administrative  body  or  of  a 
director  of  a  Federal  reserve  bank.  The  directors  are  required  to 
devote  their  entire  tim"  to  the  business  of  the  corporation,  except 
such  time  as  they  may  give  to  other  governmental  business.  They  are 
to  receive  salaries  to  be  fixed  by  the  Secretary  of  the  Treasury,  with 
the  approval  of  the  President,  not  in  excess  of  the  salary  of  the  head 
of  an  executive  department  of  the  Government. 

The  bill  is  so  drawn  that  where  a  man  is  receiving — as  a  mem- 
ber of  the  Federal  Reserve  Board  is  now  receiving — $12,000  a 
vear.  if  hj  were  appointed  a  inember  of  this  board  of  directors  he 
could  not  receive  additional  compensation:  but  if  some  other  Gov- 
ernment official  were  put  on  this  board  who  was  receiving,  say,  $6.000, 
then  the  corporation  could  grant  an  additional  $6.000  a  year  in  order 
to  bring  his  salary  up  to  $12.000  a  year:  that  is,  if  $12,000  should  be 
fixed  as  the  salary  for  members  of  the  board  of  directors  of  this 
corporation. 


14  WAR    FINANCE    CORPORATION. 


SECTION    r,. 


This  section  defines  the  corporate  powers  of  the  corporation,  in- 
cluding the  specific  provisions  for  extending  aid  to  "  war  industries," 
while  the  regulation  which  the  corporation  is  to  exercise  over  secur- 
ity issues  is  provided  for  in  section  7. 

The  corporation  is  granted  (subdivision  (a))  the  ordinary  powers 
and  privileges  enjoyed  by  corporations,  including,  among  others, 
the  power  to  sue  and  be  sued,  to  contract,  to  adopt  a  corporate  seal. 
to  appoint  officers  and  agents,  and.  with  the  approval  of  the  Secre- 
tary of  the  Treasury,  to  adopt  by-laws  for  the  conduct  of  its  business 
and  to  define  the  powers  and  duties  of  its  officers. 

The  corporation  is  empowered  (subdivision  (b))  to  make  advances, 
for  periods  not  exceeding  five  years,  upon  such  terms  as  it  may 
prescribe.  "(1)  to  any  bank,  banker,  or  trust  company" — you  see. 
it  is  not  limited  to  banks  in  the  Federal  Reserve  System — "  and 
which  has  outstanding  anv  loan  or  loans  to  any  person,  firm,  cor- 
poration, or  association  whose  operations  shall  be  necessary  or  con- 
tributory to  the  prosecution  of  the  war  and  evidenced  bv  a  note  or 
notes,  or  ('2)  to  any  bank,  banker,  or  trust  company  which  ha-  ren- 
dered financial  assistance,  directly  or  indirectly,  to  anv  such  person, 
firm,  corporation,  or  association  by  the  purchase  of  its  bonds  or  other 
obligations."  The  bill  thus  provides  two  different  methods  for 
extending  aid  indirectly  to  "war  industries''  through  any  bank. 
banker,  or  trust  company  {referred  to  generally  as  a  bank).  These 
two  different  methods  have  no  sharply  defined  line  of  demarcation, 
but  they  are  based  upon  two  generally  distinct  devices  used  in  cor- 
porate finance.  The  first  method  is  where  financial  requirements  are 
provided  for  through  bank  loans,  and  the  second  method  is  where 
such  requirements  are  provided  for  through  the  sale  of  securities. 

The  first  method  (see  (1)  in  preceding  paragraph)  applies  when 
the  bank  has  made  a  direct  loan  to  a  "war  industry"  evidenced  by 
a  note.  This  is  the  ordinary  bank  transaction,  and  the  bill  provides 
that  the  corporation  may  make  an  "  advance "  to  the  bank  to  the 
extent  of  75  per  cent  of  the  bank's  loan  to  the  particular  "  war  indus- 
try." 

The  second  method  (see  (2)  above)  of  extending  aid  to  a  "  war  indus- 
try "  through  a  bank,  applies  where  a  bank  has  purchased  the  bonds 
or  other  obligations  of  a  "  war  industry  "  either  directly  from  a  "  war 
industry"  or  from  others.  The  "war  industry"  has  been  benefited 
by  the  sale  of  its  securities,  whether  this  sale  has  l>een  made  directly 
by  the  "  war  industry"  to  the  bank  or  indirectly  through  others,  and 
the  corporation  is  therefore  authorized  in  either  case  to  make  an 
advance  to  the  bank.  These  "  advances  "  may  be  made  to. the  bank  up 
to  7o  per  cent  of  the  "  market  value  ''  of  the  bonds  or  other  obligations 
of  the  "  Avar  industry  "  acquired  by  the  bank.  It  provides  a  method 
by  which  banks  may  procure  funds  from  the  corporation  upon  this 
class  of  securities. 

Let  me  take  the  case  of  a  power  company,  for  instance,  which  is 
furnishing  a  large  amount  of  power  to  coal  mines.  Suppose  a  bank 
had  bought  $100,000  of  the  bonds  of  that  power  company.  The 
power  company  would  be,  of  course,  a  war  industry,  because  it  is 
furnishing  power  for  the  production  of  coal,  which  is  used,  in  turn. 


WAR    FINANCE    CORPORATION.  15 

to  run  the  factories  that  are  turning  out  war  munitions  or  other 
supplies  needed  for  the  war.  In  such  case  the  War  Finance  Cor- 
poration may  loan  to  that  bank  75  per  cent  of  the  market  value  of 
the  bonds  which  the  bank  has  bought. 

Under  either  of  these  provisions  (1)  or  (2)  the  aid  extended  by 
the  corporation  to  the  "  war  industry ''  is  indirect  and  the  advances 
made  to  the  bank  are  always  secured  by  the  obligation  of  the  bank. 
This  plan  enables  the  corporation  to  aid  "  war  industries  v  through 
the  ordinary  banking  channels.  In  either  case  the  bank  must  not 
only  give  its  own  note  to  the  corporation  for  the  amount  of  the  ad- 
vance received  from  the  corporation,  but  must  also  secure  that  note 
by  the  notes  or  bonds  or  other  obligations  of  the  particular  "  war 
industry  "  the  purchase  or  acquisition  of  which  forms  the  basis  for 
the  advance  by  the  corporation. 

The  terms  of  the  advances,  including  the  interest  rate,  are  to  be 
determined  by  the  corporation,  with  the  limitation  that  no  advance 
is  to  be  for  longer  than  five  years. 

As  alternative  arrangements,  instead  of  75  per  cent  advances  to 
the  banks,  advances  may  be  made  by  the  corporation  up  to  100  per 
cent  of  the  particular  loans  made  by  the  banks  to  a  u  war  industry," 
or  up  to  100  per  cent  of  the  market  value  of  the  bonds  or  other 
obligations  of  a  "  war  industry.''  provided  that  in  either  case  the 
bank,  to  which  the  particular  advance  is  made,  shall  itself  supply 
additional  collateral  to  the  extent  of  25  per  cent  of  the  advance. 

These  provisions  as  to  security  require-  in  effect  that  the  corpora- 
tion shall  have  an  equity  of  at  least  25  per  cent  in  the  security  for 
the  advances  in  addition  to  the  obligation  of  the  bank,  to  which  the 
particular  advance  is  made. 

You  can  see  the  whole  theory  of  this  bill  will  oblige  the  corpora- 
tion to  take  only  well-secured  loans,  just  as  Federal  Reserve  Banks 
are  required  to  take  only  well-secured  loans. 

The  corporation  may  (subdivision  (c))  make  advances  directly  to 
savings  banks  and  other  banking  institutions  which  receive  "sav- 
ings deposits  "  on  the  note  of  the  borrowing  institution,  secured  by 
collateral  to  the  extent  of  125  per  cent  of  the  amount  advanced.  The 
duration  of  these  advances  is  limited  to  90  days. 

I  stated  before  the  Senate  committee,  in  response  to  questions,  that 
there  would  be  no  objection  to  making  these  loans  to  savings  banks 
for  a  period  of  one  year  if  that  should  seem  to  be  desirable,  and 
that  the  bill  might  be  so  amended  if.  in  the  judgment  of  the  com- 
mittee, it  was  thought  wise  to  do  so. 

As  I  have  said,  the  duration  of  these  advances  is  limited  to  90 
days,  and  the  interest  rate  is  required  to  be  not  less  than  1  per  cent 
in  excess  of  the  rate  of  discount  on  90-day  commercial  paper  pre- 
vailing at  the  Federal  Reserve  Bank  in  the  district  in  which  the 
borrowing  institution  is  located.  This  provision  will  tend  to  restrict 
the  borrowings  of  these  institutions  from  the  War  Finance  Corpora- 
tion to  cases  in  which  the  necessary  funds  shall  not  be  obtainable 
through  ordinary  banking  channels. 

I  may  say  that  the  purpose  of  this  bill  is  not  to  preclude  the  bor- 
rowing between  banks  and  trust  companies,  by  one  bank  from  an- 
other, in  the  usual  way.  as  they  are  doing  now.  It  is  only  an  addi- 
tional facility.  It  is  not  intended  to  restrict,  but  to  enlarge  existing 
facilities. 


16  WAR    FINANCE    CORPORATION. 

It  may  be  suggested  that  a  loan  to  a  savings  bank  is  not  an  aid  to 
am  "  war  industry."  It  is,  however,  important  for  the  protection  of 
the  whole  financial  and  industrial  fabric  that  these  institutions, 
which  hold  the  savings  of  the  working  people,  should  be  able 
pn.mptly  to  obtain  cash  with  which  to  meet  any  demands  that  may 
be  made  upon  them,  without  sacrificing  sound  investment  securities 
under  possibly  abnormal  market  conditions.  If  for  any  reason  the 
necessary  funds  should  not  be  obtainable  through  the  ordinary  bank- 
ing channels,  then  the  War  Finance  Corporation  would  be  in  posi- 
tion to  make  the  necessary  advances.  It  would  unquestionably  have 
a  most  far-reaching  and  detrimental  effect  upon  the  "war  indus- 
tries," as-  well  as  others,  if  solvent  institutions  of  this  character 
should  not  be  able  to  obtain  funds  to  meet  their  obligations  without 
sacrificing  needlessly  the  securities  they  hold. 

Advances  to  savings  banks  are  to  be  made  not  only  for  the  pro- 
tection of  these  institutions  themselves  and  the  savings  of  the  work- 
ing classes,  many  of  whom  are  themselves  engaged  in  war  indus- 
tries, but  for  the  protection  of  the  community  from  the  shock  and 
financial  disturbance  which  would  unquestionably  result  if  these 
institutions  because  of  abnormal  conditions  should  be  unable  to  meet 
promptly  the  demands  of  their  depositors.  Any  such  financial  dis- 
turbance might  seriously  embarrass  the  borrowing  operations  of 
the  Government. 

In  ordinary  times,  current  deposits  in  savings  banks  are  in  exces.- 
of  withdrawals,  but  as  every  effort  is  now  being  made  to  induce  the 
investment  of  savings  in  Government  securities,  deposits  in  savings 
banks  will  probably  be  less  than  they  otherwise  would  be.  Savings 
bank  depositors  have,  I  understand,  been  discouraged  from  with- 
drawing deposits  for  investment  in  Government  bonds,  but  there  will 
always  be  withdrawals  for  one  reason  or  another  and  in  some  com- 
munities at  least,  there  has  been  a  net  loss  of  deposits.  So  far  no 
embarrassment  has  resulted,  but.  if  continued,  an  enforced  sale  of 
securities  to  meet  the  demands  of  depositors  might  result.  Further- 
more, as  most  savings  banks  do  not  pay  more  than  4  per  cent,  the 
falling  off  in  deposits  would  probably  be  accentuated  if  the  Govern- 
ment should  at  any  time  offer  bonds  at  a  higher  rate  than  4  per  cent, 
for  that  would  probably  have  the  effect  of  inducing  withdrawals  for 
investment  in  Government  securities,  no  matter  how  much  the  prac- 
tice might  be  discouraged. 

The  proposed  act  safeguards  the  savings  banks  by  providing  a 
method  by  which  they  may  obtain  loans  on  these  securities,  instead  of 
having  them  thrust  upon  the  market.  The  War  Finance  Corpora- 
tion will  not,  however,  make  such  advances  unless  they  are  amply 
secured,  but  will  stand  ready  to  lend  prompt  assistance  when  needed, 
upon  the  security  required. 

The  corporation  is  authorized  (subdivision  (d))  to  make  advances 
in  exceptional  cases  to  war  industries  "upon  such  terms  and  upon 
the  security  of  such  bonds,  notes,  or  other  obligations,  and  subject  to 
such  rules  and  regulations  as  may  be  prescribed  by  the  board  of 
directors  of  the  corporation,  with  the  approval  of  the  Secretary  of 
the  Treasury."  This  provision  is  intended  to  give  the  corporation 
power  to  render  direct  assistance  to  "war  industries"  without  the 
intervention  or  obligation  of  any  bank.  The  assistance  which  mav 


WAR    FINANCE    CORPORATION.  17 

be  rendered  through  the  banks  which  I  have  already  described  is  of 
course  indirect. 

This  subdivision  (d)  is  an  emergency  provision,  so  that  direct 
assistance  may  be  rendered  in  exceptional  cases,  where  and  when  it  is 
urgently  needed,  without  compliance  with  the  provisions  of  subdi- 
visions (b)  and  (c).  The  corporation  may  call  for  additional  col- 
lateral for  any  advances  which  it  may  make  under  any  of  these  sub- 
divisions (a),  (b).  or  (c). 

The  corporation  may  (subdivision  (6))  buy,  subscribe  for,  and 
deal  in  bonds  and  obligations  of  the  United  States  to  such  extent  as 
the  Secretary  of  the  Treasury  may  from  time  to  time  determine. 
Much  has-  been  said  about  the  market  price  of  Liberty  bonds  and  the 
subject  has  received  careful  study,  following  is  a  quotation  from 
the  last  annual  report  of  the  Secretary  of  the  Treasury : 

The  niau  who  subscribes  for  a  Government  bond  and  is  advertised  as  a 
patriot  for  doing  so  is  not  a  patriot  if  he  immediately  sells  that  bond  on  the 
market  when  he  does  not  imperatively  need  the  money.  It  is  not  mere  sub- 
scription to  a  bond  that  helps  the  Government ;  it  is  the  actual  purchase  of  the 
bond  and  the  keeping  of  the  bond  that  really  helps.  The  people  must  save  and 
invest  in  Government  bonds.  It  is  by  actually  lending  money  to  the  Government 
and  not  by  merely  promising  it  and  shifting  the  load  to  some  one  else  that 
the  citizen  really  helps  in  this  great  time.  If  loans  are  made  to  the  Govern- 
ment and  bonds  are  taken  therefor,  the  lender  is  supposed  to  deny  himself 
something  which  releases  in  turn  a  demand  on  the  vital  supplies  or  stores  of 
the  country  and  puts  the  Government  in  position  to  buy  the  supplies  thus 
released  and  to  furnish  them  to  our  armies  and  navies.  But  if  the  lender  im- 
mediately sells  his  bonds,  relieves  himself  of  the  obligation  to  save  vital  sup- 
plies, sind  goes  on  wasting  them  he  does  his  country  a  grievous  injury  and  hurts 
himself  as  well. 

I  want  to  make  it  clear  that  there  is  no  desire  on  the  part  of  the  Government 
to  prevent  or  to  interfere  with  freedom  of  legitimate  trading  in  Government 
bonds — that  is,  trading  in  good  faith. 

The  only  sound  and  sure  way  to  protect  the  market  price  of  Gov- 
ernment bonds  is  to  teach  the  people  to  save,  so  that  they  may  become 
true  investors  in  bonds  and  not  merely  subscribers  for  bonds.  Yet 
there  will  be  on  every  issue  subscribers  who  find  themselves  unable 
to  pay  for  their  bonds,  or  through  necessity,  misfortune,  or  otherwise 
are  obliged  to  sell  them.  And  there  will  always  be  those,  few  in  num- 
ber I  am  glad  to  believe,  whose  patriotism  is  of  the  surface  sort  and 
who  take  the  credit  of  appearing  as  subscribers  but  are  unwilling  to 
make  the  necessary  sacrifices  to  enable  them  to  become  permanent  in- 
vestors in  the  bonds.  Last,  and  least,  are  those  sympathizers  with 
the  enemy  who  deliberately  sell  ther  bonds  with  a  view  to  the  injury 
that  they  may  do  to  the  credit  of  the  United  States.  I  have  studied 
with  interest  various  measures  which  have  been  introduced  in  Con- 
gress and  plans  which  have  been  presented  to  me  for  preventing 
Liberty  bonds  from  going  below  par.  Most  of  these,  I  am  sorry  to 
say.  have  been,  though  very  well  meant,  ill  considered  and  calculated 
to  destroy  the  success  of  the  Government's  financial  plans.  Any  pro- 
hibition upon  the  sale  of  Liberty  bonds  would  restrict  subscriptions 
to  such  an  extent  as  to  jeopardize  the  success  of  future  loans,  and 
would  be  an  act  of  bad  faith  toward  those  who  have  subscribed  to  the 
past  loans  and  may  be  unable  to  hold  their  bonds.  Any  attempt  to 
peg  the  price  of  Liberty  bonds  at  par  would  be  unwise  and  subject 

43122—18 2 


18  WAR   FINANCE    CORPORATION. 

to  legitimate  criticism  as  turning  the  Government's  long-term  20  or 
25  or  30  year  bonds  into  demand  obligations. 

The  only  way  in  which  that  could  be  done  Avould  be  for  the  Govern 
ment  to  stand  ready  to  redeem  them  at  part  at  any  time.  The  pur- 
pose of  borrowing  on  time  by  the  Government  is  exactly  the  same 
purpose  which  animates  the  manufacturer  or  merchant  to  borrow 
for  a  definite  period  in  reference  to  his  needs,  with  a  view  to  paying 
back  the  obligation  at  maturity,  and  the  man  who  lends  the  money 
has  no  right  to  expect  a  borrower  to  pay  it  back  in  advance  upon  his 
demand  at  any  time. 

There  is  always  a  different  reasoning,  however,  about  the  Govern- 
ment. Many  people  seem  to  think  that  if  they  lend  their  money  to 
the  Government  for  10  years  and  the  Government  agrees  to  take  it 
for  10  years  .and  pay  the  principal  in  full  upon  maturity  and  interest 
in  the  meantime,  if  they  get  tired  and  want  to  sell  their  bonds,  the 
Government  ought  to  stand  ready  to  take  them  back  immediately; 
in  other  words,  to  stand  ready  to  convert  a  10-year  obligation  into  a 
demand  obligation.  They  would  never  think  of  expecting  that  of  a 
manufacturer  or  an  individual  or  a  banker  who  borrowed  the  money 
for  a  definite  length  of  time. 

And  yet  many  people  have  the  idea  that  the  Government,  because  it 
borrows  their  money  for  10  or  20  years,  or  whatever  period  it  may  be, 
and  agrees  to  pay  it  back  at  maturity  at  par  with  interest  meanwhile 
at  the  stipulated  rate,  must  stand  ready  to  respond  to  their  demand 
find  redeem  the  bonds  before  maturity  at  par,  merely  because  they 
want  it. 

The  great  mass  of  the  purchasers  of  Liberty  bonds  not  only  are 
buying  them  with  a  view  to  holding  them  primarily  because  they  are 
a  good  investment,  but  also  because  they  patriotically  want  to  help 
the  Government ;  and  I  must  say  I  have  been  immensely  gratified 
with  the  splendid  spirit  shown  by  the  people  throughout  the  United 
States  in  buying  Government  bonds.  I  think  I  may  say  that  out  of 
the  last  two  Liberty  loans,  when  we  sold  over  five  billion  eight  hun- 
dred million  dollars  of  bonds,  there  probably  has  not  been  resold  up 
to  date  in  the  market  more  than  one  hundred  million  of  these  bonds. 

If  the  Government  attempted  to  make  only  demand  loans,  it  would 
not  be  possible  to  pay  them,  and  we  should  put  ourselves  in  position 
to  face  some  extraordinary  calamity.  If  the  Government  attempted 
to  pay  those  loans  on  demand  it  might  be  bankrupted.  Then,  again. 
I  think  that  if  you  undertook  to  peg  the  market  at  par  you  would 
encourage  people  to  turn  their  bonds  back  to  the  Government  when 
they  get  a  little  tired  of  holding  them.  Those  people  are  not  suffi- 
ciently informed  about  the  importance  of  holding  on  as  long  as  they 
can,  and  if  they  find  that  they  can  turn  them  back  at  par  they  would 
do  so  quicker,  whereas  if  they  may  be  penalized  for  selling  before 
maturity  they  may  not  be  so  anxious  to  sell. 

Practically  to  attempt  to  maintain  Government  bonds  at  par  in- 
volves the  idea  of  issuing  interest-bearing  currency.  It  is  impossible 
to  peg  the  price  of  $6.000,000,000  or  $10,000.000.000  of  any  security. 
The  price  of  Government  bonds  will  fluctuate  as  the  price  of  other 
securities  fluctuates.  The  man  who  holds  on  to  his  bonds  and  now 
watches  calmly  a  downward  variation  in  the  price  of  his  bonds,  will 
see  the  time  come  when  the  variation  will  be  the  other  way  and  his 
bonds  will  sell  at  a  premium.  It  is  highly  desirable  that  violent 


WAR  FINANCE   CORPORATION.  19 

and  unnecessary  fluctuations  in  price  should  be  avoided  and  that  all 
possible  measures  should  be  taken  to  stabilize  the  price  of  Liberty 
bonds.  The  War  Finance  Corporation  would  be  able.  I  believe,  to 
stabilize  to  a  large  extent  the  price  of  Liberty  bonds.  It  is  well 
known  that  a  comparatively  small  buying  power  will  not  only  dis- 
courage those  speculatively  or  viciously  disposed  persons  who  might 
desire  deliberately  to  depress  the  price  of  Government  bonds  but 
would  furnish  added  impetus  to  any  upward  movement  in  the  price. 
This  plan  is  along  the  lines  of  the  plans  adopted  in  European  coun- 
tries whereby  sinking  funds  or  specfic  appropriations  are  made  for 
the  purchase  of  bonds  with  the  same  object  in  view,  arid  is  better 
than  any  of  them,  I  think,  because  the  Government  itself  is  removed 
from  the  transaction. 

The  purpose  I  have  in  view,  under  this  subdivision  (e)  of  the  pro- 
posed act.  is  simply  to  permit  this  corporation  to  act  in  any  circum- 
stances that  may  develop,  to  such  an  ex-tent  as  may  seem  wise  in 
steadying  the  market  for  Government  bonds.  I  say,  if  in  the  judg- 
ment of  the  board  of  directors,  such  an  operation  were  wise.  My  own 
judgment  is  that  no  effort  ought  to  be  made  on  any  large  scale  to 
maintain  the  price  of  Government  bonds.  But  there  may  be  times 
when  it  will  be  of  very  great  value  to  have  some  means  through 
which  we  could  steady  the  situation. 

The  corporation  is  also  empowered  (subdivision  f )  to  issue  its  own 
bonds  or  notes  or  obligations.  The  word  "  notes."  which  is  used  in 
the  bill,  has  been  very  much  misunderstood.  It  has  been  said  that 
this  corporation  was  going  to  issue  bank  notes  to  circulate  as  cur- 
rency. That,  of  course,  is  most  emphatically  not  the  case.  I  sug- 
gest that  the  bill  be  changed  by  the  substitution  of  the  word  "  bonds  " 
for  "notes'"  in  this  subdivision,  so  as  to  avoid  that  misunderstand- 
ing. I  shall  refer  to  what  the  bill  calls  notes  as  bonds. 

I  want  to  make  it  absolutely  clear  that  the  power  of  the  corpora- 
tion to  issue  its  own  bonds  does  not  mean  any  power  whatever  to 
is-ue  currency.  It  is  a  means'  of  providing  funds  in  addition,  to 
the  proceeds  of  the  sale  of  its  stock  to  the  United  States,  by  the  issue 
and  sale  of  its  own  securities.  The  amount  of  the  corporation's 
bond  issues  outstanding  at  any  one  time  is  limited  to  eight  times  the 
paid-in  capital  stock  (i.  e..  a  maximum  issue,  in  case  all  the  stock  is 
actually  paid  in.  of  $4,000,000,000). 

It  could  never  issue  and  have  outstanding  over  $4,000.000,000  of 
bonds  and  then  only  against  security  which  is  at  least  25  per  cent 
greater  than  the  amount  of  its  own  bonds,  plus  all  of  the  $500.000,000 
capital  stock. 

These  bonds  which  the  War  Finance  Corporation  may  issue  are 
required  to  run  for  not  less  than  one  year  nor  more  than  five  years. 
They  may  bear  such  rate  or  rates  of  interest  and  may  be  made  re- 
deemable at  the  option  of  the  corporation,  as  the  board  of  directors, 
with  the  approval  of  the  Secretary  of  the  Treasury,  may  determine. 
These  bonds  are  given  a  first  and  paramount  floating  charge  upon  the 
insets  of  the  corporation  and  are  not  to  be  otherwise  secured,  for 
the  corporation  is  specifically  prohibited  from  placing  any  lien  of 
mortgage  upon  its  property. 

The  purprse  of  these  provisions  is  to  make  anv  bonds  it  issues 
',\  paramount  floating  lien  or  mortgage,  because  the  corporation  is 
prohibited  from  creating  any  mortgage  or  other  charge  which  would 


20  WAR   FINANCE   CORPORATION. 

have  priority  over  the  bonds.  Whatever  bonds  the  corporation  issues 
are  protected  by  a  blanket  obligation  and  a  paramount  lien  upon  all 
the  assets  of  the  War  Finance  Corporation. 

I  now  want  to  take  up  another  aspect  of  the  bonds  which  may  he 
issued  by  the  War  Finance  Corporation.  The  Federal  reserve  banks 
are  authorized,  subject  to  the  regulations  of  the  Federal  Reserve 
Board,  to  purchase,  rediscount,  and  use  paper  secured  by  the  bonds 
of  the  War  Finance  Corporation  in  the  same  manner  and  to  the 
same  extent  that  paper  secured  by  bonds  or  notes  of  the  United 
States  not  bearing  the  circulation  privilege  may  be  similarly  used, 
purchased,  and  rediscounted.  There  are.  however,  two  important 
exceptions  to  this  statement.  First,  the  Federal  Reserve  Board  may 
require  the  Federal  reserve  hanks  to  charge  a  higher  discount  rate 
on  paper  secured  by  the  securities  of  the  War  Finance  Corporation 
than  on  paper  othenvise  secured;  and,  second,  the  Federal  Reserve 
Board  may  impose  upon  the  Federal  reserve  banks  a  special  interest 
charge  in  respect  to  Federal  reserve  notes  issued  against  paper  se- 
cured by  the  securities  of  the  War  Finance  Corporation,  which  need 
not  be  applicable  to  Federal  reserve  notes  otherwise  secured. 

These  provisions  are  made  in  order  to  impose  a  special  tax  in 
effect  upon  Federal  reserve  notes  circulated  by  the  Federal  reserve 
banks  against  paper  secured  by  the  bonds  of  this  corporation,  on 
the  theory  that  it  is  an  emergency  measure,  and  so  obtain  the  retire- 
ment as  quickly  as  possible  of  any  Federal  reserve  note  issues  that 
may  from  time  to  time  be  issued  against  the  security  of  this  class  of 
paper.  That  is  a  mere  matter  of  machinery  that  is  easily  worked  out. 

It  is  believed  that  the  right  to  impose  this  higher  discount  rate  and 
this  special  interest  charge  will  enable  the  Federal  Reserve  Board 
to  exercise  a  beneficial  control  over  the  issue  of  Federal  reserve  notes 
based  on  bank  paper  secured  by  the  corporation's  bonds.  All  existing 
provisions  of  law  not  inconsistent  with  the  provisions  of  the  bill 
are  expressly  made  applicable  to  Federal  reserve  notes  issued  against 
paper  secured  by  the  bonds  of  the  corporation.  The  Federal  reserve 
banks  are  also  authorized  to  make  advances  to  member  banks  secured 
by  bonds  of  the  War  Finance  Corporation. 

There  has  been  some  criticism  of  the  bill  on  the  idea  that  in  some 
way  or  other  there  will  be  currency  inflation.  Any  idea  of  currency 
inflation  must  result  from  a  misconception  as  to  the  bonds  issued  by 
the  corporation,  for  there  is  no  danger  that  such  securities  will  cause 
inflation  through  an  undue  expansion  of  the  circulating  medium  of 
the  country. 

It  must  always  be  remembered  that  the  Federal  Reserve  Board  has 
absolute  control  over  the  issue  of  Federal  reserve  notes.  That  board 
would  undoubtedly  be  quick  to  restrict  the  issue  of  such  notes  if  at 
any  future  time  the  danger  of  inflation  appeared. 

T  think  I  have  made  it  clear  that  the  bonds  of  the  War  Finance 
Corporation  are  not  intended  to  circulate,  though  they  may  of  course 
be  bought  and  sold  like  other  ordinary  corporate  bonds  or  notes. 
Moreover,  they  can  not  directly  be  made  the  basis  of  Federal  reserve 
note  issues.  In  this  respect  they  stand  in  the  same  situation  as 
Liberty  bonds. 

If  a  member  bank  makes  a  loan  to  a  customer  for  the  purpose  of 
enabling  the  customer  to  buy  either  Liberty  bonds  or  bonds  of  the 
War  Finance  Corporation,  taking  the  customer's  note,  eligible  for 


WAR   FINANCE   CORPORATION.  21 

rediscount  in  other  respects  also,  the  member  bank  may  indorse  and 
rediscount  that  note  at  the  Federal  reserve  bank  of  its  district.  The 
Federal  reserve  bank,  having  discounted  the  note  indorsed  by  the 
member  hank  may,  with  the  approval  of  the  Federal  Reserve  Board, 
in  turn  take  out  Federal  reserve  circulation  upon  the  security  of  such 
note.  As  the  note  indorsed  by  the  member  bank  must  mature  in  not 
more  than  90  days  the  Federal  reserve  notes  issued  against  it  must 
then  be  either  retired  or  other  security  must  be  found  therefor.  Fed- 
eral reserve  note  issues  will  contract  or  expand  responsively  to  the 
contraction  or  expansion  of  the  demands  for  credit  upon  the  member 
banks. 

The  Federal  reserve  act  requires  that  there  shall  always  be  main- 
ini.ied  for  Federal  reserve  notes  a  "gold  cover"  of  at  least  40  per 
cent. 

SECTION    7. 

This  section  prohibits  the  sale  or  offering  for  sale  or  for  sub- 
scription by  any  person,  firm,  corporation,  or  association,  of  any 
issue  of  securities  in  excess  of  $100,000,  or  any  part  of  any  such 
issue,  issued  after  the  approval  of  the  act.  except  under  rules  and 
regulations  prescribed  by  the  corporation,  with  the  approval  of  the 
Secretary  (if  the  Treasury,  and  under  licenses  from  the  corporation 
in  case  such  rules  and  regulations  shall  so  require.  I  may  say  that 
amount  may  be  increased;  I  am  not  wedded  to  the  $100,000  limit. 
We  can  make  it  larger  if  it  should  seem  wise.  The  $100,000  limita- 
tion was  fixed  with  the  idea  of  establishing  a  limitation  which  shall 
he  sufficiently  large  so  that  the  corporation  shall  not  be  burdened  to 
an  impracticable  extent  with  the  duty  of  passing  upon  minor  issues 
of  securities,  and  which  shall  also  be  sufficiently  small  so  that  the 
uncontrolled  issue  of  a  very  large  aggregate  amount  of  securities  shall 
not  be  permitted. 

The  difficulty  has  been  to  get  the  provisions  of  the  bill  sufficiently 
broad  to  bring  under  the  regulation  of  the  corporation  the  issue  of  all 
securities  which  it  was  desirable  that  the  corporation  should  regulate, 
and  at  the  same  time  not  include  a  vast  number  of  transactions  which 
do  not  involve  capital  expenditures. 

It  is  not  intended  that  the  corporation  shall  exercise  any  regulation 
over  securities  already  issued,  for  new  issues  of  securities  make  the 
principal  demands  upon  capital  seeking  investment.  The  prohibition 
against  selling  or  the  offering  for  sale  of  securities  therefore  applies 
only  to  securities  issued  after  the  approval  of  the  act.  Xo  buying 
or  selling  of  existing  securities  in  or  out  of  any  stock  exchange  is 
prohibited.  Though  the  terms  of  the  bill  are  broad  enough  to  pro- 
hibit any  sale  of  securities  issued  after  the  date  of  the  approval  of  the 
act.  whether  or  not  they  have  once  been  licensed,  it  is  probable  that 
the  corporation  will  in  most  instances  find  it  desirable  in  licensing 
anv  issue  of  securities  at  the  same  time  to  license  any  resale  of  such 
securities.  This  arrangement  would  mean  that  once  the  sale  of  an 
issue  of  securities  had  been  licensed-  all  further  trading  in  such  issue 
should  be  entirely  free.  It  may  be  that  the  regulations  issued  by  the 
corporation  will  require  a  notation  of  the  license  to  be  made  upon  the 
securities  themselves.  In  that  case  it  would  give  those  securities  a 
greater  market  availability.  The  bill  is  not  intended  to  prohibit,  or 


22  WAR   FINANCE    CORPORATION. 

in  any  way  to  interfere  with,  the  ordinary  bank  borrowings  for  the 
purpose  of  transactions  in  the  ordinary  course  of  business.  Any  other 
borrowings  in  excess  of  $100.000  evidenced  by  bonds,  notes,  or  other 
obligations  are  subject  to  the  prohibitions  of  the  bill  against  the  sale 
or  offering  for  sale  of  securities  without  a  license  from  the  corpora- 
tion, if  the  regulations  established  by  the  corporation  shall  require 
such  a  license.  Let  me  say  that  the  corporation  does  not  have  to  issue 
regulations  and  licenses.'  It  is  only  in  a  position  to  do  so  if  any 
exigency  develops  where  it  is  desirable  that  the  matter  should  be 
regulated  by  a  formal  license. 

In  order 'that  there  may  be  no  embarrassment,  while  the  opera- 
tions of  the  corporation  are  being  gotten  under  way.  to  corporations 
having  pressing  capital  requirements,  such  for  example  as  maturing 
obligations,  in  making  arrangements  to  meet  these  requirements,  the 
bill  provides  that  this  section  shall  not  take  effect  until  the  rules  and 
regulations  under  which  the  corporation  will  exercise  its  functions 
shall  have  been  duly  prescribed. 

The  provisions  of  section  7  of  the  bill  do  not  apply  to  any  railroads 
which  may  be  in  the  possession  and  control  of  the  President.  These, 
of  course,  could  not  be  subject  to  the  provisions  of  the  bill. 


SECTION    8. 


This  section  prescribes  a  fine  of  $5,000  or  imprisonment  for  four 
years,  or  both,  as  the  penalty  for  violation  of  any  of  the  provisions 
of  the  act. 


SKCTION     !>. 


The  sulplus  earnings  of  the  corporation  not  required  for  its 
operations  are  to  be  accumulated  in  a  reserve  fund  to  be  invested 
under  the  direction  of  the  Secretary  of  the  Treasury,  in  bonds, 
notes,  or  certificates  of  indebtedness  of  the  United  States.  This  sec- 
tion also  provides  for  the  liquidation  of  the  corporation,  beginning 
six  months  after  the  termination  of  the  war.  The  proceeds  of  such 
liquidation  are.  of  course,  to  be  paid  over  to  the  United  States. 

This  corporation  will  undoubtedly  be  profitable,  because  it  can  not 
lose  money  under  the  plan  devised. 


SKCTION    10. 


The  corporation  is  to  be  exempt  from  taxation  except  that  its  real 
estate  is  to  be  subject  to  local  taxation  in  like  manner  as  other  real 
estate.  The  securities  of  the  corporation  are  to  be  subject  only  to  like 
taxation  as  the  bonds  of  the  second  Liberty  loan. 


SKI   I  IONS     11.     \2.    AND    13. 


These  section^  define  the  term  "securities,"  reserve  the  right  of 
amendment,  and  provide  that  the  invalidity  of  any  portion  of  the  act 
dclared  invalid  by  any  court  of  competent  jurisdiction  shall  not  in- 
validate it  as  a  whole. 

(The  committee  thereupon  adjourned  until  Tuesday,  February  19. 
1918.  at  10  o'clock  a.  m.) 

• 


WAR   FINANCE    CORPORATION.  23 

COMMITTEE  ON  WAYS  AND  MEANS, 

HOUSE  OF  REPRESENTATIVES, 
Washington,  D.  C.,  February  19,  1918. 

The  committee  met  at  10  o'clock  a.  m..  Hon.  Claude  Kitchin  (chair- 
man) presiding. 

Present:  The  chairman,  Messrs.  Rainey,  Dixon.  Hull,  Garner, 
Dickinson,  Oldfield.  Crisp.  Helvering,  O'Shaunessy.  White,  Ford- 
ney,  Moore,  Sloan.  Long-worth.  Sterling.  Martin.  Hawley,  and 
Treadway. 

Present  also:  Hon.  Paul  M.  Warburg.  Vice  (Governor  of  the  Fed- 
eral Reserve  Board. 

The  CHAIRMAN.  The  committee  will  come  to  order. 

STATEMENT  OF  HON.  PAUL  M.  WARBURG,  VICE  GOVERNOR, 
FEDERAL  RESERVE  BOARD. 

Mr.  WARBI'R<;.  Secretary  McAdoo  has  submitted  to  your  commit- 
tee a  very  full  statement  concerning  the  general  purposes  of  the  bill 
before  you.  He  has  gone  so  fully  into  the  discussion  of  its  various 
provisions  that  I  hardly  expect  that  you  wish  me  to  amplify  his 
remarks  in  this  respect.  I  take  it  that  Avhile  Secretary  McAdoo  dis- 
cussed the  matter  from  the  point  of  view  of  the  Treasury  you  wish 
me  to  deal  with  it  from  the  point  of  view  of  the  Federal  Reserve 
Board,  dealing  particularly  with  the  sections  affecting  the  operations 
of  the  Federal  reserve  banks. 

I  believe  it  is  unnecessary  for  me  to  dwell  at  length  upon  the  fact 
that,  through  the  extended  financial  operations  of  the  Government 
and  through  other  conditions  inherent  to  the  Avar,  the  security  mar- 
ket in  the  United  States  has  been  very  seriously  affected.  It  is  a 
well-known  fact  that  not  only  have  prices  for  securities  materially 
declined,  but  even  at  this  reduced  level  it  is  most  difficult  to  find  pur- 
chasers for  securities.  Under  those  circumstances  there  is  a  natural 
disinclination  on  the  part  of  banks  to  grant  or  continue  loans  on 
securities.  There  is,  furthermore,  a  distinct  feeling  of  anxiety  on 
the  part  of  the  savings  banks  that  if  deposits  should  be  withdrawn 
they  would  have  difficulty  in  realizing  upon  their  assets,  and  at  best 
that  they  could  do  so  only  by  taking  very  heavy  losses.  In  addition, 
even  the  strongest  corporations  find  it  difficult  to  renew  maturing 
obligations  or  to  finance  in  order  to  pay  for  improvements  or  addi- 
tions necessary  or  previously  contracted  for. 

This  is  a  grave  situation  realized  by  all,  and  I  think  it  may  be 
stated  as  a  matter  of  common  agreement  that  it  is  imperative  that 
something  should  be  done  to  relieve  it.  There  are  three  methods  of 
bringing  about  the  desired  relief:  (1)  By  letting  all  necessary  as- 
sistance be  extended  by  the  Treasury;  (2)  by  amending  the  Federal 
reserve  act  so  as  to  permit  loans  on  stocks  and  bonds  to  be  granted 
by  Federal  reserve  banks:  and  (3)  by  the  creation  of  a  new  and  inde- 
pendent organization  dealing  with  the  present  emergency. 

As  to  the  first  method,  it  is  evident,  without  my  elaborating  this 
point,  why  it  would  be  most  undesirable  for  the  Treasury  to  enter 
this  field.  Leaving  aside  the  direct  burden  involved  for  the  Treas- 
ury, touched  upon  yesterday  by  Secretary  McAdoo,  there  are.  in 
addition,  obvious  and  grave  reasons  militating  against  allowing  the 


24  WAR    FINANCE    CORPORATION. 

Government  through  the  Treasury  to  go  directly  into  the  business  of 
granting  loans  to  private  concerns  to  the  degree  which  would  be 
necessary  at  this  time.  A  corporation  organized  for  the  purpose, 
administered  by  a  separate  board  <;f  directors,  and  with  a  definite 
capital  set  aside  for  that  purpose,  would  offer  a  better  instrument, 
particularly  with  the  proviso  contained  in  the  bill  that,  immediately 
upon  the  conclusion  of  peace,  the  liquidation  of  the  corporation  must 
proceed,  so  that,  upon  its  dissolution,  normal,  methods  both  of  gov- 
ernment and  business  automatically  would  be  restored. 

As  to  the  second  method — relief  to  be  granted  by  the  Federal  re- 
serve banks — bills  have  been  introduced  to  provide  for  enlarged 
powers  on  these  lines,  but  the  board  has  expressed  itself  as  much  op- 
posed to  such  a  course.  As  far  as  it  possibly  can  be  done,  the  Federal 
Reserve  System  ought  to  remain  a  purely  commercial  structure  based 
upon  liquid  loans.  It  would  be  unfortunate  and  inadvisable  to 
undermine  the  strength  and  loaning  power  of  the  Federal  Reserve 
System  because  the  security  market  at  present  has  gone  to  pieces. 
The  legislation  now  proposed  proceeds,  therefore,  on  the  third  line: 
that  is,  the  creation  of  a  new  and  independent  organization  having 
for  its  object  relief  rather  by  a  resurrection  of  the  security  market 
than  by  destroying  the  discount  market. 

The  War  Finance  Corporation  provides  for  a  machinery  which. 
by  creating  a  new  short-term  bond — which,  no  doubt,  will  enjoy  a 
wide  .market — will  "thaw  out  frozen  securities."  Almost  all  trans- 
actions contemplated  for  the  corporation  will  have  the  effect  of  sub- 
stituting for  maturing  or  unsalable  obligations  the  readily  market- 
able short-term  bond  of  the  War  Finance  Corporation.  So  far  as 
this  process  can  be  carried  out.  it  will  serve  to  relieve  the  Federal 
Reserve  System  from  pressure  and  not  add  to  its  burdens,  as  many 
appear  to  think.  It  will  place  securities  where  they  ought  to  rest — in 
the  security  market  and  with  the  investor — and  will  prevent  the 
strong  pressure  which  exists  at  this  time  to  push  into  the  member 
banks  and.  through  them,  into  the  Federal  reserve  banks,  loans  which 
are  "  camouflaged  "  as  commercial  paper,  but  which,  as  a  matter  of 
fact  are  nothing  but  a  means  of  carrying  unsalable  securities. 

If  the  war  is  to  be  won  by  us.  our  financial  structure  must  be  kept 
alive  and  strong,  and  ways  and  means  must  be  found  to  provide  for 
the  necessary  financing  for  such  industries  as  do  a  business  either 
essential  to  the  prosecution  of  the  war  or  to  the  general  welfare  of 
the  people. 

It  is  furthermore  imperative  that  our  savings  banks  and  our  banks 
should  remain  protected,  because  any  unnecessary  financial  weak- 
ness affects  unfavorably  the  Government's  power  successfully  to 
carry  through  its  financial  operations. 

I  have  noticed  a  great  many  comments  in  the  public  press  to  the 
effect  that  the  power  of  Federal  reserve  banks  to  rediscount  for 
member  banks  paper  secured  by  short-term  bonds  of  the  War  Finance 
Corporation  is  bound  to  lead  to  inflation.  I  believe  there  has  been 
widespread  misunderstanding  of  this  feature  of  the  bill.  Many 
people  appear  to  think  that  it  is  proposed  to  empower  the  Federal 
reserve  banks  to  issue  notes  directly  against  these  obligations;  in 
other  words,  to  endow  them  with  the  note-circulation  privilege,  as 
in  the  case  of  the  old  2  per  cent  United  States  Government  bonds. 
Nothing  of  the  kind  is  proposed.  All  that  is  contemplated  is  that. 


WAR    FINANCE    CORPORATION.  25 

just  in  the  same  manner  as  authorized  with  respect  to  Liberty  loan 
bonds,  member  banks  may  rediscount  their  15-day  notes,  secured  by 
short-term  bonds  pf  the  War  Finance  Corporation,  or  the}'  may 
rediscount  the  notes  of  their  customers,  having  to  run  not  in  excess 
of  !>0  days,  secured  by  such  short-term  bonds.  In  other  words,  the 
appeal  of  the  War  Finance  Corporation  will  be.  first,  to  the  security 
market  by  trying  to  sell  its  short-term  bonds  to  new  investors,  unless 
these  short-term  bonds  are  given' in  exchange  to  the  holders  of  matur- 
ing obligations,  and  only  when  the  bonds  can  not  be  absorbed  by  the 
investment  market  will  they  go  into  the  banks,  and  only  when  the 
banks  have  accumulated  more  of  these  short-term  bonds  than  they 
can  carry  with  theiv  own  resources,  then  will  they  appeal  to  the  Fed- 
eral reserve  banks  for  loans  against  these  bonds.  As  stated  above, 
these  loans  can  be  granted  only  for  15  days  or  90  days,  and  at  the 
expiration  of  that  period  they  are.  as  far  as  the  Federal  reserve  bank 
is  concerned,  due  and  payable. 

People  have  been  frightened  by  the  amount  of  $4,000,000,000  men- 
tioned in  the  bill  as  the  outside  limit  of  short-term  bonds  that  may 
be  issued.  But  we  must  bear  in  mind  that  it  is  one  of  the  foremost 
objects  of  this  legislation  to  strengthen  confidence.  For  that  reason 
it  is  advisable  that  the  scope  of  this  corporation  be  not  too  narrowly 
circumscribed.  The  stronger  its  lending  power  the  greater  its  power 
to  command  confidence.  But  that  does  not  mean  that  it  is  expected 
to  issue  anything  like  the  maximum.  As  a  matter  of  fact,  whenever 
the  corporation  would  find  that  the  securities  market  could  not  absorb 
the  bulk  of  these  short-term  bonds,  and  whenever  it  would  be  found 
that  the  banks  are  beginning  to  carry  too  large  a  proportion  of  these 
s  cin-ities.  and  when,  again,  the  banks  would  lean  too  heavily  on  the 
Federal  reserve  banks,  then  the  War  Finance  Corporation  would 
have  to  slow  down  its  speed  of  doing  business.  Otherwise,  instead  of 
being  a  help  to  the  Government  in  keeping  the  market  strong,  it 
would  have  a  detrimental  effect  upon  the  financial  operations  of  the 
Government.  I  look  upon  this  War  Finance  Corporation  as  an 
emergency  organization  to  take  care  of  the  security  market  in  a  man- 
ner similar  to  that  in  which  the  Federal  Reserve  System  takes  care 
of  emergencies  in  the  commercial-paper  market.  In  Europe  central 
banks  have  large  powers  in  case  of  need  to  make  loans  on  all  kinds 
of  securities.  Our  financial  system  has  been  devoid  of  such  an  emer- 
gency instrument,  and  it  is  to  provide  for  this  weakness  in  our  organi- 
zation  that  the  War  Finance  Corporation  is  being  proposed. 

During  these  last  few  days  I  have  been  asked  quite  frequently  why 
I  should  be  in  favor  of  a  war  finance  corporation  when  I  had  ex- 
pressed myself  as  being  opposed  to  the  resurrection  of  the  Aldrich- 
Vreeland  note-issuing  machinery  and  the  so-called  Calder  bill.  In 
answer  to  that  I  have  written  a  very  short  memorandum,  which,  with 
your  kind  permission.  I  should  like  to  embody  in  my  statement. 

(The  memorandum  follows  as  Exhibit  A:) 

KXHIIUT  A. 

MKMOKANDr.M. 

"\VASHI.\<;TO.V.  b'cliruarii  13.  1918. 

The  object  of  this  memorandum  is  to  outline  briefly  some  of  the  most  impor- 
tant points  of  difference,  in  substance  and  effect,  between  the  so-called  raider 
hill  and  the  \var  finance  corporation. 


26  WAR    FINANCE    CORPORATION. 

(1)  The  Calder  bill  would  give  power  to  Federal  reserve  banks  to  rediscount 
member  banks'  notes  secured  by  "such  bonds  or  notes  of  any  railroad,  industrial, 
public-utility  corporation,  or  municipality,  as  the  Federal  Reserve  Board,  upon 
investigation,  deems  a  proper  security  for  the  Federal  reserve  banks  T<>  receive 
;is  collateral."    For  the  purposes  of  this  memorandum  we  must  assume,  of  course. 
that  if  the  bill  were  passed  the  Federal  Reserve  Board  would  permit  the  redis- 
count of  member  bank  notes  secured  by  such  collateral.     Upon  that  assumption 
it  is  clear  that  billions  of  outstanding  securities  would  become  directly  available 
MS  collateral   for  advances  by   Federal   reserve  banks,  and   indirectly   available 
as  security  for  Federal   reserve  notes.     It  would  not  be  a  question  of  dealing 
only  with  Dew  financing  "compatible  with  the  public  interest  at  this  time,"  or 
with  the  renewal   of  maturing  obligations,  but  the  whole  mass  of  securities 
already  outstanding  would  become  available  without  any  power  of  differentia- 
tion at  all  as  to  whether  or  not  they  are  serving  the  public  interest  at  this  time. 
The  proceeds  of  such  borrowing  could  be  used  for  anything — compatible  or  in- 
compatible.    It  is  unnecessary  to  elaborate  the  importance  of  this  point. 

(2)  Granting  that  most  of  the  securities  covered  by  the  raider  bill  are  eirher 
unsalable  to-day  or  could  be  sold  only   with  substantial   concessions,  even  as 
against  the  present  heavily  reduced  prices,  the  Calder  bill  does  not  have  for  its 
object  to  find  a  means  of  thawing  out  these  frozen  securities.     The  only  solu- 
tion that  the  ("'aider  bill  provides  is  that  holders  of  securities,  either  directly 
or  indirectly,  pledge  them  against  advances  to  be  secured  from  Federal  reserve 
banks.     The  finance  corporation,  on  the  other  hand,  provides  ways  and  means 
by  which  the  appeal   should  be  made  not  exclusively  to  the   Federal   Reserve 
System  but  to  the  securities  market  in  general.     By  substituting,  in  effect,  the 
short-term  bond   for  the  unsalable  security   of   industrial    corporations,   public 
utilities,  railroads  or  municipalities,  or  by  substituting  these  short-term  bonds 
for   the  maturing  obligations   of   such   corporation,   a   new   security    is   offered 
which  will  have  a  general  market,  first,  because  it  will  be  considered  a  Govern- 
ment security  and.  second,  because  of  the  fact  that  some  provision  is  made,  in 
case  of  emergency,  to  use  these  bonds  as  collateral  for  borrowings  from  Federal 
reserve  banks.    To  make  this  point  clear,  suppose  that  an  electric  company  has 
maturing  bonds   amounting  to   $10.000,000;    it   wants  to  offer   instead  a    five- 
year  electric  note,  but  finds  it  impossible  to  place  the  same.     Under  the  Calder 
bill  all  that  could  possibly  be  done  would  be  to  borrow  the  full  amount  from 
the  Federal  reserve  bank.     Under  the  plan  of  the  war  finance  corporation  five- 
year  bonds  of  that  corporation  would  be  issued  and  either  taken  in  exchange  by 
the  holders  of  the  old.  maturing  electric  notes  or  the  new  five-year  short-term 
bonds  could  be  placed  on  the  market  and  the  proceeds  \ised  to  pay  off  the 
maturing   notes.      In    other  words,    the   finance   corporation    should    have    the 
tendency  of  reopening  the  security  market  for  now  unsalable  securities,  so  that 
new   elasticity  will   be  given   the   securities   market   instead   of   regarding  this 
market  as  hopelessly  dead,  and  instead  of  using  the  Federal   Reserve  System. 
an  instrument  created  for  the  protection  of  commercial  paper,  as  a  market  upon 
which  to  unload  unsalable  securities. 

(3)  It  is  safe  to  conclude  from  the  above  that  the  amount  of  paper  secured 
by  War  Finance  Corporation  bonds  expected  to  be  rediscounted  with  Federal 
reserve  banks  would  be  much  smaller  than  the  amount  likely  to  be  borrowed 
from  the  Federal  Reserve  System  in  the  ease  of  the  Calder  bill,  not  only  be- 
cause, in  the  first  case,  the  absorbing  power  of  the  security  market  acts  as  a 
buffer,  and  only  what  the  security  market  can  not  take — and  what,  after  that. 
the  banks  can  not  carry — will  go  into  the  Federal  Reserve  System,  but  also,  as 
stated   under    (1),   because  the  output  of  the  short-term   bonds  by   the   Wai- 
Finance  Corporation  is  restricted  to  definite  purposes  of  the  present  emergency, 
while,  under  the  Calder  bill,  the  only  possible  assistance  would  have  to  come 
through  the  Federal  Reserve  System,  and  all  securities  issued  during  past  genera- 
tions would  become  available  as  collateral  without  any  scrutiny  as  to  the  obiects 
for  which  they  have  been  issued. 

(4)  If  we  have  these  points  clearly  in  mind,  it  is  incomprehensible  why  the 
hue  and  cry  of  inflation   should  be  raised   against   the  finance  corporation  by 
the  very  people  who  apparently  are  in  favor  of  the  Calder  bill.     At  a  matter  of 
fact,  as  above  stated,  we  would  have  to  expect  a  much  larger  degree  of  inflation 
under  the  Calder  bill  than  under  the  proposed  War  Finance  Corporation  legisla- 
tion.    Are  we  not  driven  to  the  logical  conclusion  that  these  critics  of  the  War 


WAR    FINANCE    CORPORATION.  27 

Finance  Corporjitioii  bill  are  opposed  to  it  because  it  restricts  inflation  so  much 
more  than  the  ('alder  bill,  rather  than  because  they  are  generally  apprehensive 
of  too  much  inflation  to  be  caused  by  the  contemplated  legislation? 

I  believe  you  wish  me  to  say  a  few  words  about  the  proposed 
method  of  licensing  the  sale  of  securities.  I  can  best  illustrate  what 
is  proposed  to  be  done  by  giving  yon  a  sketch  of  what  has  been  done 
in  England  by  a  similar  organization  and  what  has  been  done  so 
far  by  us  in  the  United  States. 

When  the  war  broke  out,  in  1914,  there  was  at  once  organized  in 
England  the  so-called  capital  issues  committee,  of  which  the  per- 
sonnel was  as  follows:  Lord  St.  Aldwyn  (formerly  Sir  Michael  Hicks 
Beach),  who  had  been  chancellor  of  the  exchequer  from  1896  to  1902, 
chairman;  Lord  Cunliffe,  governor  of  the  Bank  of  England;  Sir 
Thomas  Whittaker,  M.  P.  (liberal)  ;  Sir  Frederick  Yanbury,  M.  P. 
(unionist)  ;  Sir  George,  Barnes,  assistant  secretary  of  the  board  of 
trade:  and  Mr.  B.  P.  Blackett,  secretary. 

Mr.  Blackett  is  at  this  time  in  Washington  as  financial  adviser  to 
the  British  Embassy.  Some  months  ago,  when  this  question  of  con- 
trol of  issues  of  securities  was  discussed,  he  was  invited  to  write  a 
short  report,  giving  an  outline  of  what  was  done  in  England.  This 
report,  which  is  very  instructive,  I  beg  leave  to  have  inserted  in  my 
statement. 

(The  report  is  attached  as  Exhibit  B.) 

(Confidential.) 

EXHIBIT    B. 

NEW  YORK.  Auyn>tt  il.  l!)17. 
Memorandum  for  Mr.  Curtis,  Federal   Reserve  Rank,  New  York  Pity. 

GOVERNMENT     CONTROL     OF     NEW     CAPITAL     ISSUES     IN     GREAT     BRITAIN. 

The  control  of  new  issues  of  capital  by  the  British  Government  started  with 
the  regulations  for  the  reopening  of  the  stock  exchange,  which,  after  being 
dosed  from  the  end  of  July.  1914,  was  reopened  at  the  beginning  of  January, 
191.1.  subject  to  special  conditions  agreed  upon  between  the  Rritish  treasury 
and  the  committee  of  the  London  Stock  Exchange  and  accepted  by  the  other 
stock  exchanges  in  the  United  Kingdom.  In  accordance  with  this  agreement, 
the  committee  of  the  stock  exchange  bound  itself  and  the  members  of  the  stuck 
exchange  to  deal  in  stocks  and  shares  subject  strictly  to  certain  regulations 
approved  by  the  Rritish  treasury  and  made  binding  upon  the  stock  exchange. 
These  regulations  were  not  statutory,  but  the  penalty  of  failure  to  observe  them 
in  any  part'cular  was  expulsion  from  the  stock  exchange  of  any  member  found 
guilty  of  contravening  the  regulations.  Particular  regulations  dealing  with 
new  issues  of  capital  laid  it  down  that  no  dealings  should  be  allowed  on  the 
stock  exchange  in  any  securities  issued  subsequent  to  the  date  of  the  regula- 
tion unless  the  issue  of  such  securities  had  been  tirst  approved  by  the  Rritish 
treasury. 

A  committee  known  as  the  "Capital  issues  committee"  was  ap|M>inted  by  the 
chancellor  of  the  exchequer  to  examine  all  applications  for  approval  of  new 
issues  and  to  recommend  to  the  treasury  whether  or  not  approval  should  be 
given  for  such  issue.  The  original  members  of  this  committee  were  Lord  St. 
Aldwyn  (formerly  Sir  Michael  Hicks  Reach),  who  has  been  chancellor  of  the 
exchequer  from  1S9(>  to  1902,  chairman;  Lord  Cunliffe.  governor  of  the  Bank 
of  England;  Sir  Thomas  Whittaker.  M.  P.  .(liberal):  S:r  Frederick  Ranbury, 
M.  I',  (unionist)  ;  and  Sir  George  Rarnes.  assistant  secretary  of  the  board  of 
trade1,  with  Mr.  R.  P.  Blackett  as  secretary. 


28  WAR   FINANCE    CORPORATION. 

On  the  death  of  Lord  St.  Aldwyn  u  year  later  Lord  Cunliffe  became  chair- 
maii  and  .Mr.  Gaspard  Farrer.  of  Baring  Bros.,  \vas  added  to  the  committee. 
Mr.  Blackett  resigned  the  secretaryship  in  July.  191."),  ami  the  representative 
of  the  hoard  of  trade  lias  changed  more  than  once. 

It  was  soon  found  that  applications  for  permission  to  make  new  issues  were 
being  received  nor  merely  in  respect  of  important  new  issues,  such  as  would 
expect-  to  obtain  a  quotation  on  the  stock  exchange,  but  also  in  respect  of  issues 
of  shares  and  debentures  by  publ:c  and  private  companies  of  all  sorts.  It  was 
decided  tliat  it  was  desirable  as  far  as  possible  to  prevent  any  new  issue  taking 
place  without  treasury  approval,  although  the  penalty  of  being  unable  to  obtain 
dealings  on  the  stock  exchange  was  of  little  or  no  importance  in  many  cases. 
There  have  undoubtedly  been  a  certain  number  of  new  issues  by  private  com- 
panies and  small  public  companies,  such  as  a  company  to  run  an  individual 
cinematograph  theater,  but.  with  the  assistance  of  the  bankers  and  of  the  vast 
majority  of  outside  brokers  and  financial  houses,  practically  speak'ng,  no  new 
issue  of  the  least  importance  has  taken  place  since  January.  191.").  without 
treasury  approval.  The  number  of  applications  dealt  with  up  to  the  end  of 
June.  1917,  was  something  like  15,000.  In  practice,  the  treasury  has  accepted 
in  every  case  the  recommendat'on  of  the  committee  and  it  is  generally  under- 
stood in  the  city  of  London  that  an  appeal  against  the  decision  of  the  com- 
mittee is  simply  an  appeal  for  reconsideration  by  the  same  committee  and  that 
the  chancellor  of  the  exchequer  will  not  interfere.  This  has  been  of  consider- 
able importance  from  the  parliamentary  point  of  view,  because  the  chancellor 
of  the  exchequer  has  been  able  to  shelter  himself  behind  the  opinion  of  the 
representative  city  committee  against  complaints,  which  have  been  numerous, 
of  the  action  of  the  treasury  in  regard  to  specific  cases. 

The  procedure  adopted  by  the  committee  has  been,  broadly  speaking,  to  deal 
with  the  less  important  cases,  which  form  the  vast  majority  of  the  total,  in 
a  somewhat  summary  fashion,  and  to  refuse  applications  for  new  issues  unless 
and  until  a  fairly  good  case  has  been  made  out,  either 

(1)  That  the  new  issive  is  necessary  or  desirable  from  the  point  of  view  of 
the  successful  prosecution  of  the  war:  or 

(2)  That  to   refuse  permission   would   involve  the   complete   loss   of   capital 
already  expended  or  at  any  rate  would  involve  a  very  heavy  loss  of  previously 
expended  capital. 

Tiie  more  important  cases  may  be  divided  into  two  categories : 

(1)  A  disappearing  category;  cases  in  which  leave  is  asked  for  the  issue  of 
capital  on  behalf  of  foreign  or  colonial  governments  or  corporations.     In  these 
cases  there  has  been  an  increasing  tendency  to  insist  on  the  funds  required 
being  obtained  outside  the  United  Kingdom — that  is.  occasionally  in  Holland  or 
elsewhere,  but  usually  in  the  United  States  of  America. 

(2)  rases  where  the  issue  is  alleged  to  be  necessary  for  the  prosecution  of  the 
war,  that  is.  usually  in  connection  with  some  firm  engaged  on  Government  con- 
tracts.    In  these  cases  arrangements  have  been  perfected  for  obtaining  the  advice 
of  the  Government  department  or  Government  departments  concerned,  i.  e.,  the 
war  office.  Admiralty,  board  of  trade,  and.  above  all,  the  ministry  of  munitions; 
and  sometimes  other  departments.     The  decision  in  such  cases,  subject  to  techni- 
cal questions  on  the  method  of  finance,  is  nearly  always  dependent  on  the  view 
taken  by  the  responsible  Government  department  as  to  the  desirability  of  the 
issue  from  the  point  of  view  of  securing  necessary  supplies. 

I  should  perhaps  add  a  third  category,  namely,  renewals  of  maturing  de- 
bentures, etc..  which  are,  as  a  rule,  granted  without  much  examination,  unless 
there  is  an  obvious  opportunity  for  referring  the  application  to  a  neutral  money 
market. 

The  issue  of  loans  by  the  Governments  of  the  British  Dominions  of  Provinces 
and  States  of  the  British  Dominions  or  by  the  Government  of  India,  has  been 
reserved  by  the  treasury  and  dealt  with  in  connection  with  war  finance  without 
any  recommendation  being  required  from  the  capital  issues  committee. 

It  may  be  stated  broadly  that  after  a  transition  period  covering  the  year 
191.").  no  new  issues  of  any  sort,  except  for  renewal  purposes,  has  been  approved 
unless  for  the  purpose  of  the  successful  prosecution  of  the  war. 

Soon  after  the  capital  issues  committee  was  constituted,  the  question  of  capi- 
tal expenditures  and  borrowings  by  local  authorities  in  Great  Britain  came 
under  the  consideration  of  the  committee.  In  January.  1915.  many  of  the  local 
authorities  had  not  yet  got  over  the  idea  which  was  so  prevalent  at  the  begin- 


WAB  FINANCE   CORPORATION.  29 

ning  of  the  war  that  Government  and  municipal  capital  expenditure  would  be 
necessary  or  desirable  for  the  purpose  of  preventing  unemployment.  Local 
authorities  in  Great  Britain  finance  their  capital  expenditure  (1)  by  the  issue 
of  stock  on  the  market,  (2)  by  the  issue  of  six  months'  or  one-year  bills.  (3) 
by  the  issue  of  mortgages  on  the  security  of  the  rates  which  are  sold  from  day 
to  day  over  the  country  for  amounts  of  £100  or  even  in  a  few  cases  of  £10. 
These  mortgages  usually  run  three  or  five  years  in  the  first  instance,  biit  they 
are  frequently  left  after  the  original  term  has:  expired  at  call,  and  are  very 
popular  because  they  are  not  subject,  as  a  rule,  to  market  fluctuations. 

The  capital  issues  committee  as  such  did  not  (leal  in  detail  with  the  question 
of  new  capital  expenditure  by  local  authorities,  hut  recommended  the  treasury 
to  take  the  question  up  with  a  view  to  preventing  new  capital  expenditure  as 
far  as  possible.  The  town  clerks  and  treasurers  of  most  of  the  large  cities 
were  interviewed  at  the  treasury,  and  it  was  urged  upon  them  that  in  order 
to  conserve  the  capital  and  labor  of  the  country  for  the  prosecution  of  the  war 
further  capital  expenditure  by  local  authorities  should  be  prevented  as  far 
as  possible. 

A  circular  drawn  up  by  the  treasury  was  issued  in  .March.  1  })!.">.  by  the  local 
Government  board,  informing  all  local  authorities  that  the  sanction  of  the  local 
Government  board  would  not  be  given  for  new  capital  expenditure  in  any  cases 
where  such  sanction  was  necessary  by  law  unless  the  local  authority  could  prove 
to  the  satisfaction  of  the  treasury  that  such  expenditure  was  essential  for  the 
prosecution  of  the  war.  e.  g..  extension  of  electric-power  plants  owned  by  munici- 
pal corporations  or  in  the  interests  of  public  health,  e.  g..  water  supply  in  cases 
where  there  was  a  serious  danger  of  shortage.  This  circular  covered  capita! 
expenditure  by  most  of  the  smaller  authorities  but  did  not  cover  capital  expendi- 
ture on  a  large  scale  by  many  of  the  large  cities,  whose  authority  for  such  ex- 
penditure is  dependent  upon  acts  of  Parliament  already  obtained.  In  practice. 
however,  pressure  from  the  treasury  and  the  local  Government  board  and  coop- 
eration by  the  treasurers  and  town  clerks  has  sufficed  in  this  matter,  even  in 
respect  of  contracts  already  let.  For  example,  there  was  a  contract  involving 
over  1  .OOO.OOO  sterling  for  the  erection  of  a  new  county  hall  by  the  London 
County  Council.  Arrangements  have  been  made  with  the  contractors  to  bring 
the  work  to  an  end  for  the  period  of  the  war  as  soon  as  a  stage  has  been 
reached  where  a  building  can  be  left  unfinished  without  the  work  already  done 
being  wasted.  As  a  result,  capital  expenditure  by  the  local  authorities  has 
practically  ceased,  and  one  incidental  effect  has  been  that  considerable  sums 
accrued  on  the  sinking  funds  established  in  connection  with  capital  expenditure 
by  the  local  authorities  have  become  available  for  investment  in  war  loans, 
owing  to  the  closing  down  of  the  channels  previously  available  for  the  invest- 
ment of  such  moneys,  namely,  capital  expenditure  by  the  local  authority  itself, 
since  some  of  the  authorities  were  in  the  habit  of  using  their  sinking  funds  to 
finance  their  new  capital  expenditure,  or  capital  expenditure  by  other  local 
authorities,  since  it  was  a  favorite  practice  for  one  corporation  to  lend  its  sink- 
ing-fund moneys  to  another  corporation. 

In  dealing  with  the  closing  down  of  work  upon  contracts  in  the  course  of 
progress,  considerable  difficulty  was  naturally  met  with  in  reaching  a  fair  set- 
tlement as  between  the  local  authority  and  the  contractor.  This  difficulty  was. 
however,  overcome,  first,  by  the  issue  of  a  circular  by  the  treasury  to  the  banks 
asking  them  not  to  give  accommodation  for  new  building  works  of  any  kind 
unless  these  were  proved  to  be  necessary  in  connection  with  the  prosecution  of 
the  war.  and.  finally,  by  the  issue  of  a  regulation  under  the  defense  of  the  realm 
act  by  the  ministry  of  munitions  making  it  necessary  for  the  sanction  of  the 
ministry  to  be  obtained  for  any  expenditure  on  new  buildings  in  excess  of  £.~>OO. 
This  regulation  was  justified  by  the  difficulties  met  with  by  the  ministry  of 
munitions  in  providing  labor  for  the  building  of  new  munitions  works  and  for 
the  operations  of  munition  factories  generally  in  various  districts  where  the 
existence  of  large  building  contracts  in  the  course  of  progress  was  found  to  be 
leading  to  serious  shortage  of  labor  for  munitions  purposes. 

Apart  from  this  regulation  under  the  defense  of  the  realm  act  in  regard  to 
building  work,  the  only  legislation  of  which  I  am  aware  remotely  connected 
with  the  control  of  new  issues  of  capital  is  a  section  in  an  act  which  has  the 
effect  of  extending  the  period  during  which  "ancient  lights"  and  similar  rights 
and  franchises  are  kept  alive  for  an  extra  period  corresponding  to  the  period 
during  which  new  building  work  has  been  prohibited  by  reason  of  the  war.  and 


30  WAR   FINANCE    CORPORATION. 

a  stock  clause  in  nil  m>\v  acts  of  Parliament  ^ivinjr  new  borrowing  ]»o\ver  to 
municipal  corporations,  railway  companies,  etc..  under  wliich  the  exercise  of 
any  new  borrowing  powers  conferred  by  such  act  is  made  subject,  for  the  i>eriod 
of  the  war  and  12  months  thereafter,  to  the  sanction  of  the  treasury. 

Apart  from  these  special  cases,  the  whole  control  by  the  Government  of  new 
issues  of  capital  has  been  based  on  cooperative  arrangements  with  bodies  such 
as  the  stock  exchange,  the  association  of  cleariiiir  house,  hankers,  etc. 

BASH.   I*.   HI.AI  KKTT. 

NEW  YOKK.  Aii'tHxt  <i,   1917. 

To  give  you  in  a  nutshell  how  the  English  committee  organized 
and  what  it  brought  about,  I  should  say  that,  as  a  matter  of  form, 
this  committee  was  a  voluntary  organization.  There  was  no  specific- 
law  which  forced  anybody  to  submit  to  the  regulation  of  the  commit- 
tee, but.  as  a  matter  of  fact,  it  acted. as  a  law.  Immediately  upon 
the  organization  of  the  committee  stock  exchanges  agreed  not  to 
quote  any  new  securities  except  such  as  had  been  passed  upon  favor- 
ably by  the  committee,  and  investment  houses  would  not  touch  any 
securities  which  had  not  been  so  approved.  This  gave  the  committee 
complete  control  and  it  exercised  such  control  very  rigidly.  They 
recognized  at  once  that  in  order  to  win  the  war  it  was  not  only  a 
question  of  conserving  to  the  greatest  possible  degree  all  available 
credit  and  the  savings  of  the  country,  but  also  the  goods  and  the  men, 
and  that,  therefore,  all  unnecessary  expenditures  and  unnecessary 
operations  should  be  restricted.  The  committee  addressed  itself  with 
particular  rigidity  to  the  operations  of  municipalities  and  counties. 
Where  contracts  had  been  made  for  construction  not  necessary  for 
England's  immediate  requirements,  the  Government  went  so  far  as 
to  indemnify  contractors  in  order  to  halt  the  construction  and  the 
waste  of  funds,  of  material,  and  labor  involved. 

It  is  interesting  to  note  the  results  of  the  operations  of  the  English 
capital  issues  committee.  I  beg  leave  to  submit  for  insertion  in  my 
statement  a  table  which  shows  the  issues  in  previous  vears  and  the 
issues  in  the  years  of  the  operations  of  the  committee 

(The  table  follows  as  Exhibit  C.) 


WAR   FINANCE    CORPORATION. 


31 


EXHIBIT  C. 

New  capita)  issues  on  the  London  market,   c.rdiixirc   of   re >i dors'   share*   mid 

rcborrowinp  operation*. 

[In  thousands  of  pounds.] 


Issues. 

1913 

1914 

1915 

1916 

6  months 
to  June  30, 
1917. 

British  Government  loans                   

£332,500 

£614,251 

£554,071 

£1,038,483 

Colonial  Government  loans     

£26,270 

38,674 

17,385 

6,500 

6,453 

Colonial  corporations                                

14,811 

7,754 

350 

14  941 

23  378 

3,965 

Total  items  2-4                      

56,031 

69,806 

21,700 

6,500 

6,453 

Foreign  government  loans             

26,  158 

18,333 

38,450 

15,000 

Foreign  corporations 

6,958 

10,606 

Foreign  railways  .        

17,411 

12,  795 

2,940 

384 

American  railways 

10,  627 

1,416 

Total  items  5-8 

61,  154 

43,  150 

41,390 

15,384 

British  municipal  loans 

920 

3,096 

495 

British  railways                 .          . 

1,019 

2,161 

3,294 

1,679 

Electric  lighting,  power,  telephone,  etc  
Tramways  and  omnibus.           ..            . 

6,916 
4,710 

6,746 
5,  8(19 

.547 
432 

102 

200 
100 

Gas  and  water 

422 

G99 

20 

""ie" 

Total  items  11-13  

12,048 

13,314 

999 

118 

300 

3,329 

2  677 

21 

23 

Exploration  and  financial.. 

7,424 

5,099 

45 

24 

911 

Merchants,  etc.. 

433 

280 

102 

Manufacturing  

10,895 

7,957 

1,808 

1,449 

78 

Stores  and  trading. 

2,216 

2,263 

Estate  and  land 

4  042 

3  002 

25 

Rubber  

1,276 

718 

153 

16 

3 

Oil 

5  265 

3  408 

22 

1  574 

Iron,  coal,  steel,  etc. 

6,419 

3,673 

163 

1  275 

Motors 

1  528 

1  559 

130 

381 

332 

Hotels,  theaters,  etc                   .  . 

538 

803 

79 

Patents 

2  188 

396 

27 

Docks  and  shipping 

3,265 

7  209 

580 

800 

Banks  and  insurance  

4,494 

3,480 

266 

275 

1  500 

Miscellaneous.  . 

12  029 

5  060 

316 

1  260 

30 

Total  items  14-29 

65  365 

48,495 

3  608 

7  189 

1  943 

Grand  total  .  .  . 

196  537 

512  522 

685  242 

585  436 

1  047  179 

Destination  of  new  capital: 
United  Kingdom 

35  951 

364  420 

621  140 

British  possessions. 

76  137 

80  940 

22  289 

Foreign  countries 

84  449 

67  162 

41  912 

Total           .  . 

1%  537 

512  522 

685  242 

I  should  like  to  draw  your  attention  to  the  following  figures  from 
this  report : 


Issues. 

19131 

1916' 

Issues. 

1913' 

1916e> 

Colonial    government,    colo- 
nial corporations,  and  colo- 

Foreign government  and 
American  rails                 

£61,154 

£15,384 

nial  rails  

£56,031 

£6,500 

12,048 

111 

Mining  industrial,  etc  

65,365 

7,  18t 

1  In  thousands  of  pounds. 

I  should  also  like  to  submit  table  of  the  best  available  figures  show- 
ing the  totals  of  financial  issues,  exclusive  of  foreign  loans,  for  the 
four  years  prior  to  America's  entry  into  the  war. 


32 


WAR    FINANCE   CORPORATION. 


(The  statement  follows  as  Exhibit  C-l.) 

K.XHIBIT  C-l. 


Par  value  — 

1913 

1914 

1915 

1916 

Corporate  financing: 

$278.0  ! 
453.5 
958.5 

$271.5 
346.0 
714.5 

$571.0 
324.0 
684.5 

$951.0 
542.0 
371.0 

Utilities                       

Railroads  

Total  

1,  690.  0 

1,332.0 

1,579.5 

1,864.0 

State,  county,  and  municipal  financing: 

403.2 
161.5 
1.0 

474.1 
177.9 
3.0 

488.0 
267.3 
2.0 

445.2 
246.9 
4.7 

Canadian  loans                        

United  States  possessions                                

Total  

565.7 

655.0 

757.3 

696.8 

<irand  total  

2,255.7 

1,987.0 

2,336.8 

2,560.8 

Temporary  loans                                 

550.4 

1 

384.  6  1 

236.4 

290.:-! 

In  the  United  States,  since  many  months,  the  conviction  has  been 
growing  and  taken  a  more  definite  form  that  operations  in  our 
country  should  be  controlled  in  a  similar  manner.  Committees, 
formed  in  several  financial  centers,  urged  the  Government  to  take 
steps  on  these  lines,  and  they  became  more  insistent  as  the  banks 
and  the  public  became  convinced  that  there  was  no  such  thing  as 
•'unlimited  resources"  nor  that  there  was  any  such  thing  as  "busi- 
ness as  usual "  when,  as  a  matter  of  fact,  business  and  financing  had 
been  driven  into -the  most  unusual  channels  the  world  had  ever  seen. 

Acting  upon  these  very  urgent  pleas,  Secretary  McAdoo  issued  a 
statement  asking  all  would-be  issuers  of  new  securities  to  communi- 
cate with  him  in  order  that  he  might  express  the  point  of  view  of  the 
Government  as  to  whether  or  not  the  issue  of  such  securities  was  or 
was  not  compatible  with  the  public  interest.  This  request  of  the 
Secretary's  met  with  such  hearty  and  spontaneous  response  that  he 
found  very  soon  that  it  was  impossible  for  him  fairly  and  justly  to 
deal  with  these  cases  without  the  creation  of  an  effective  organization 
which  could  undertake  to  study  carefully  each  individual  case  and 
judge  it  upon  its  merits.  The  Secretary  therefore  invited  the  Fed- 
eral Reserve  Board  to  undertake,  as  a  voluntary  duty,  the  appoint- 
ment of  a  committee  to  act  substantially  in  the  same  manner  as  the 
British  Capital  Issues'  Committee.  The  board  undertook  these  new 
duties  and  created  such  a  committee,  consisting  of  Hon.  Charles  S. 
Hamlin.  Hon.  Frederic  A.  Delano,  and  myself  as  chairman.  This 
committee  organized  at  once  an  advisory  committee.  It  was  very 
fortunate1  in  being  able  to  prevail  upon  such  good  citizens  as  Messrs. 
Allen  B.  Forbes,  of  New  York:  F.  H.  Goff.  of  Cleveland:  and  Henry 
( '.  Flower,  of  Kans'as  City,  all  prominent  bankers,  to  become  mem- 
bers of  such  advisory  committee.  In  addition,  it  secured  the  services 
of  Mr.  Bradley  \V.  Palmer,  of  Boston,  to  act  as  its  counsel.  All  of 
these  gentlemen  filled  at  home  offices  of  great  responsibility  which 
they  unhesitatingly  left  to  serve  the  committee,  without  compensa- 
tion, as  volunteers.  The  committee  then  organized  12  subcommittees, 
with  headquarters  at  each  of  the  12  Federal  reserve  banks.  In  each 
case  the  Federal  reserve  agent  acts  as  chairman  and  the  governor  of 


WAR    FINANCE    CORPORATION.  33 

the  Federal  reserve  bank  acts  as  vice  chairman  of  the  subcommittee, 
and  three  additional  gentlemen,  representing  expert  knowledge  in 
municipal,  industrial,  or  public-utility  financing,  form,  with  such 
officers  of  the  bank,  a  standing  committee.  In  addition,  there  were 
designated  in  each  district  10  or  12  gentlemen  of  the  same  caliber, 
representing  the  various  cities  in  their  respective  districts,  to  be  avail- 
able to  give  expert  advice  in  case  transactions  should  originate  in 
their  immediate  territory.  These  latter  groups  comprise  our  so- 
called  auxiliary  committees. 

These  organizations  have  been  at  work  since  about  two  weeks,  and 
it  can  be  stated  with  confidence  that  they  may  count  upon  the  hearty 
cooperation  of  all  sections  of  the  country. 

I  have  here  copies  of  resolutions  adopted  by  the  New  York  Stock 
Exchange,  the  League  of  Kansas  Municipalities,  and  by  the  Eich- 
mond  (Va.)  Real  Estate  Exchange,  all  of  them  expressing  a  hearty 
desire  to  cooperate  with  the  committee.  The  New  York  Stock  Ex- 
change has  indeed  passed  a  resolution  that  it  will  not  quote  any  new 
security  except  it  be  submitted  to  and  favorably  acted  upon  by  our 
committee.  I  beg  leave  to  insert  these  resolutions  in  my  statement. 

(The  resolutions  follow  as  Exhibits  D.  E,  and  F,  respectively:) 

EXHIBIT  D. 

RESOLUTION    AIKH'TKl)    I!V    THK    NKW    YOHK    STOCK    KXCHAM.K. 

Whereas  the  Federal  Reserve  Board  lias,  upon  the  request  of  the  Hon.  W.  G. 
McAdoo,  Secretary  of  the  Treasury,  appointed  a  committee  of  its  members  to 
act  as  a  capital  issues  committee  authorized  to  pass  upon  such  proposals  as 
may  be  submitted  to  them  in  respect  to  capital  expenditures  or  issues  of  new 
securities. 

Resolved,  That  the  committee  on  stock  list  will  require  as  a  condition  to  the 
listing  of  such  new  capital  issues  the  presentation  of  the  approval  of  such  com- 
mittee of  the  Federal  Reserve  Board. 


EXHIBIT  E. 

MlNHIl-AI,    \VAK    SKRVICE    RESOLUTIONS. 

(Adopted  by  the  unanimous  vote  of  the  Executive  Committee  League  of  Kansas 
Municipalities,  January  17,  1918.) 

Whereas  the  supreme  need  of  the  time  is  the  concentration  of  the  energies  of  all 
individuals,  organizations,  and  units  of  government  upon  work  necessary  for 
the  winning  of  the  war;  and 

Whereas  it  is  the  desire  and  determination  of  the  municipal  authorities  and 
ctizens  of  the  cities  and  towns  of  Kansas  to  aid  in  every  possible  manner  in 
the  conduct  and  success  of  this  struggle  for  the  honor  and  safety  of  our 
Nation  and  our  allies,  and  for  humanity  and  democracy;  and 
Whereas  it  is  desirable  that  a  statement  of  proper  war-time  policy  for  the 
municipalities  of  Kansas  be  formulated  and  submitted  on  behalf  of  the  organ- 
i/od  cities  and  towns  of  the  State,  therefore 

llr  it  rexolreil  hi/  the  V.reeittin  Committee  of  the  J^ciif/iic  "f  KanxiiK  Munici- 
palities, That  it  is  recommended  that  during  the  period  of  the  war  each  and 
every  city  government  in  this  State  shall  undertake  only  such  paving  and  other 
improvement  work  as  may  be  actually  necessary  to  be  undertaken  at  this  time, 
thereby  releasing  men  and  money  for  the  service  of  the  National  Government. 
It  is  understood  that  adequate  local  public-utility  service  must  be  main- 
tained, and  that  to  that  end  the  municipal  operation  and  ownership  of  any 
privately  owned  public  utility  may  be  <>r  become  a  matter  of  vital  public  need 
and  necessity. 

43122— 18 3 


34  WAR    FINANCE    CORPORATION. 

EXHIBIT  F. 

Kcnolri'd  hi/  tin'  lilflinioinl  (!>/.)  Jft-nl  i'.xtatc  H-n-lnnii/c.  Tliat  the  President 
of  the  United  States  and  the  Secretary  of  the  Treasury  he.  and  they  are  hereby. 
requested  to  issue  an  appeal  promptly  to  all  irovernors.  and  through  them  to 
State  legislatures,  mayors,  and  legislative  hodies  of  municipalities.  requesting 
them  to  exercise  the  most  careful  scrutiny  over  all  appropriations,  and  to 
exclude  from  their  respective  budgets  every  item  that  does  not  represent  an 
actual  necessity  for  the  proper  conduct  of  the  government,  to  the  end  that  the 
States  and  municipalities  may  set  an  example  in  patriotism  and  sacrifice  for 
the  institutions  and  individuals  within  their  respective  .jurisdictions;  and  that 
material  and  labor  may  he  conserved  for  the  needs  of  our  National  Government. 

The  committee,  in  passing  upon  these  issues,  does  not  presume  to 
pass  upon  the  intrinsic  merits  of  any  security.  It  merely  examines 
it  from  the  point  of  view  of  whether  or  not  the  expenditure  to  he 
covered  by  the  financing  is  one  compatible  with  the  interest  of  the 
public,  either  from  the  point  of  vieAv  of  the  successful  prosecution  of 
the  war  or  from  the  point  of  view  of  the  public  health  and  welfare. 

In  investigating  issues,  the  committee  cooperates,  as  far  as  it  pos- 
sibly can.  with  the  respective,  departments  and  boards  of  the  Gov- 
ernment which  best  can  judge  the  facts  as  to  whether  or  not  a 
particular  thing  or  a  particular  service  is  required  at  this  time  for 
the  best  interest  of  the  country.  Broadly  speaking.  I  should  say 
that,  in  dealing  with  maturing  obligations,  the  committee  has  Taken 
the  point  of  view  that  renewals  should  be  permitted  unless  there  are 
reasons  to  the  contrary,  such  as  an  available  amount  of  cash  in  hand 
or  possibly  some  plan  of  paying  excessive  dividends  out  of  excessive 
profits.  The  same  policy  would  apply  in  dealing  with  the  funding 
of  banking  debt  incurred  prior  to  February  1.  1918.  when  the  com- 
mittee began  operations. 

As  to  the  construction  of  new  roads,  drainage  and  irrigation 
projects,  the  view  is  held  that  only  such  construction  should  be 
undertaken  at  this  time  as  is  of  great  strategic  or  economic  impor- 
tance, and  generally  only  such  as  promise  producing  results  within 
the  year  1918. 

In  dealing  with  municipal  and  State  expenditures,  the  cooperation 
is  sought  on  the  part  of  the  local  administrations  to  pare  down  their 
expenditures  to  the  lowest  possible  minimum.  In  this  respect,  cases 
that  have  come  up  for  discussion  and  action  by  the  committee  are 
most  encouraging.  We  find  that,  where  there  is  still  time  to  explain 
our  point  of  view,  and  where  definite  commitments  have  not  yet  been 
made,  there  is  a  general  inclination  to  let  the  national  interest  pre- 
vail over  the  local  at  this  time,  and  in  several  cases  we  have  prevailed 
upon  municipalities  to  postpone  issues  contemplated  and  to  restrict 
present  financing  to  such  enterprises  as  were  absolutely  necessary  at 
this  time.  I  have  no  doubt  that,  as  we  go  along  and  as  the  under- 
standing of  our  national  requirements  spreads,  we  will  have  no  diffi- 
culty in  securing  the  fullest  cooperation  from  all. 

As  to  building  operations  in  general.  I  beg  to  submit  a  statement 
which  Secretary  McAdob  gave  to  the  press  some  weeks  ago.  This 
statement  expresses  generally  the  point  of  view  adopted  by  the  com- 
mittee in  this  respect. 


WAR  FINANCE   CORPORATION.  35 

(The  statement  is  attached  as  Exhibit  G.) 

EXHIBIT  G. 

fKor  morning  papers  of  Feb.  5.  1918.] 

TREASURY  DEPARTMENT. 

Secretary  McAdoo  authorized  the  following  statement: 

1'eoause  of  r'ne  interest  of  the  Treasury  Department  in  the  conservation  of 
capital  and  credit  during  the  period  of  the  war,  I  have  received  several  in- 
quiries us  to  whether  building  operations  of  one  kind  and  another  should  be 
discouraged.  With  regard  to  plans  for  public  buildings  under  the  control  of 
this  department,  I  have  stopped  letting  contracts  except  in  cases  where  they 
were  absolutely  necessary. 

Home  building  is  an  excellent  thing  in  normal  times,  but  at  present,  unless 
there  is  a  real  shortage  of  houses  for  war  workers,  I  strongly  advise  that 
materials,  valuable  labor,  and  credit  be  not  utilized  fo  this  purpose.  Whether 
IK unes  should  be  built  should  be  determined  strictly  by  the  urgency  of  the  need. 

The  committee,  up  to  this  time,  has  requested  only  that  municipal 
issues  of  $250.000  and  above,  and  industrial  or  public  utility  issues 
of  $500.000  and  above,  be  submitted  to  it.  These  limits  were  placed 
at  a  higher  figure  than  provided  in  the  bill  because  it  was  necessary 
for  us  to  get  under  way  before  we  would  be  prepared  to  act  upon  the 
vast  number  of  cases  that  would  come  before  us  if  we  reduced  the 
limit  below  those  figures.  We  expect,  however,  very  shortly  to  be 
able  to  reduce  our  present  limits. 

I  hope  that  I  have  made  it  clear  that  the  operations  of  the  com- 
mittee are  confined  to  new  issues;  that  wherever  people  finance  them- 
selves in  the  regular  course  of  business  without  applying  to  the  in- 
vestment market  by  the  public  sale  of  securities,  in  amounts  in  ex- 
cess of  the  limits  above  described,  they  do  not  come  within  the  pur- 
view of  the  operations  of  the  committee. 

The  CHAIRMAN.  Gentlemen,  does  any  member  of  the  committee  de- 
sire to  ask  Mr.  Warburg  any  questions? 

Mr.  O'SiiAi  NKSSY.  I  would  like  to  ask  Mr.  Warburg  about  the 
committee,  of  which  he  is  a  member,  dealing  with  these  securities. 
Do  you  think  they  will  go  on  and  perform  their  duties  effectually 
without  any  law  being  passed  to  define  their  duties  and  responsi- 
bilities? 

Mr.  WARBURG.  You  mean  in  case  you  do  not  give  the  power  to  en- 
force orders? 

Mr.  O'SiiAuxEssY.  Yes;  I  mean  will  they  go  along  in  a  voluntary 
way  just  as  this  English  committee  did?  Will  they  go  along  with 
the  same  duties  and  power  as  if  they  were  created  by  law? 

Mr.  WARBURG.  In  England  they  have  an  act  which  we  call  D.  O. 
R.  A.,  the  Defense  of  the  Realm  Act,  which  is  a  very  broad  act,  and 
which  they  can  really  put  behind  anything  they  want  to  enforce. 
Such  an  act  we  have  not  got.  But  I  believe  that  without  such  an 
act  probably,  with  the  spirit  in  which  the  work  of  the  committee  has 
been  accepted,  we  probably  will  have  good  results. 

Mr.  O'SHAUNESSY.  And  it  will  be  just  as  effective? 

Mr.  WARBURG.  It  is  very  important,  however,  that  there  should  be 
some  big  stick  in  the  background.  I  mean  that  we  should  have 
power,  if  necessary,  in  case  we  can  not  get  the  cooperation,  particu- 
larly, of  some  less  patriotic  operators.  For  instance,  there  are  still  a 


36  WAR    I  INAXCE    CORPORATION. 

great  many  oil  propositions  of  a  very  doubtful  kind  which  absorb  a 
great  deal  of  money,  and  some  people  offering  them  do  not  care  what 
we  say.  It  is  very  important,  therefore,  to  have  a  big  stick  in  the 
background  which  would  indicate  that  if  we  can  not  get  voluntary 
cooperation  we  can  get  it  by  act  of  law.  I  think  that  would  he- 
useful. 

Mr.  FORDXEY.  Mr.  Warburg,  if  I  am  correct  in  my  assumption,  if 
this  bill  becomes  a  law  as  it  is  written,  almost  any  industry  of  the 
country,  through  their  local  bank,  can  get  relief  from  this  board, 
whether  directly  producing  something  for  the  war  or  not? 

Mi-.  WARBTRG.  As  a  matter  of  theory,  yes. 

Mr.  FORDXEY.  That  is  to  say.  if  the  board  feels  so  inclined  ( 

Mr.  WARBURG.  The  board  could  not  feel  so  inclined  very  long. 

Mr.  FORDNEY.  There  is  practically  no  limit  to  their  authority  if 
they  feel  so  inclined.  If  this  bill  becomes  a  law  you  can  take  almost 
any  security  a  bank  would  offer;  that  would  he  acceptable.  1  mean 
to  say. 

Mr.  WARBURG.  That  would  he  acceptable  and  that  would  be  com- 
patible with  the  public  interest.  I  think  the  directors  of  thi^  cor- 
poration would  feel  that  their  duty  primarily  is  to  protect  the  gen- 
eral welfare  and  to  do  only  such  business,  as  was  said  in  the  state- 
ment by  Mr.  McAdoo.  that  can  not  be  carried  on  by  the  usual  banking 
channels  at  this  time. 

Mr.  FORDXEY.  Mr.  Warburg,  yesterday  Mr.  McAdoo  in  his  state- 
ment made  reference  to  some  power  company,  and  I  understood  him 
to  say  the  company  was  in  Michigan:  a  waterpower  company  which 
is  furnishing  electric  power  to  street  railways  and  electric  lines  and 
industrial  institutions,  etc.  I  know  of  that  company.  It  is  a  very 
large  company,  and  they  transmit  power  fully  200  miles  away  from 
their  power  plant.  The  Secretary  spoke  of  the  large  amount  of  se- 
curities of  those  companies  that  were  outstanding  or  in  private  banks 
or  trust  companies.  Am  I  correct  in  my  understanding  of  this  bill. 
that  the  maximum  loans  are  to  be- 90  days? 

Mr.   WARBURG.  Xo. 

Mr.  FORDXEY.  I  thought  I  read  that  in  the  bill. 

The  CHAIRMAN.  That  Avas  in  reference  to  loans  to  savings  banks. 

Mr.  FORDXEY.  I  was  going  to  say  that  if  that  was  so  the  time 
should  be  extended,  because  90  days  will  do  those  people  no  good. 

Mr.  WARBURG.  Ninety  days  is  the  limit  for  Federal  reserve  banks, 
and  then  there  is  a  provision  in  the  act  providing  90  days  for  loans 
to  savings  banks:  but  I  think  when  this  question  was  discussed  in 
the  Senate  committee  the  point  was  raised  that  that  was  too  short, 
and  that  they  should  be  made  to  extend  to  one  year,  and  Mr.  McAdoo 
conceded  that  that  change  should  be  made. 

Mr.  FORDXEY.  What  is  the  maximum  rate  of  interest  charged  now 
bv  the  Federal  reserve  banks  for  commercial  loans?  I  ought  to  know, 
but  I  am  not  positive  that  I  do  know. 

Mr.  WARBURG.  Five  and  a  half  per  cent  is  the  highest,  and  that  is 
for  six  months. 

Mr.  FORDXEY.  Then  this  law  provides  not  to  exceed  1  per  cent 
above  that  amount? 

Mr.  WARBURG.  I  think  that  limit  probably  would  dror>  out  if  you 
removed  the  90-day  limit,  because  that  was  only  to  serve  as  an  index 


WAR   FINANCE    CORPORATION.  37 

for  90-day  loans.  If  you  decide  to  make  these  savings-bank  loans  up 
to  one  year,  I  think  then  you  want  to  strike  out  the  limit  entirely  and 
leave  it  to  the  hoard  of  directors:  and  I  think  it  is  very  important 
that  the  board  of  directors  should  have  a  free  hand  in  fixing  those 
rates  of  interest,  because  you  can  not  put  down  any  rule  which  would 
cover  a  one-year  loan  and  a  five-year  loan  at  the  same  time. 

Mr.  FORDNEY.  I  agree  with  you. 

Mr.  WARBURG.  Loans  may  be  made  for  DO  days  or  for  5  years  un- 
der this  act. 

Mr.  FoRDNEY".  And  undoubtedly  will  be  for  a  long  time  if  the 
securities  of  power  companies  and  such  companies  are  taken,  because 
they  can  not  meet  their  financial  obligations  in  90  days. 

Mr.  AVARBURG.  It  is  impossible.  You  will  have  to  have  normal 
linu's  again  to  dissolve  the  transactions. 

Mi1.  GARNER.  Mr.  Warburg — 

The  CHAIRMAN  (interposing).  I  would  suggest  that  when  one  gen- 
tleman begins  questioning  Mr.  Warburg  that  he  finishes  his  questions 
without  any  other  gentleman  breaking  in.  because  it  interferes  with 
the  trend  of  thought  of  Mr.  Warburg  and  also  the  trend  of  thought 
of  the  gentleman  who  is  asking  the  questions.  If  Mr.  Garner  will 
take  the  witness,  I  would  suggest  that  he  be  not  interrupted  until  he 
has  concluded. 

Mr.  GARNER.  Mr.  Warburg,  the  two  principal  features  of  this  bill 
are  the  extension  of  desirable  credit  and  the  prevention  of  undesir- 
able enterprises? 

Mr.  WARBURG.  Yes. 

Mr.  GARNER.  They  are  the  two  features  of  this  bill? 

Mr.  WARBURG.  Yes. 

Mr.  GARNER.  Why  was  it  you  did  not  undertake  to  perform  those 
duties  through  the  Federal  reserve  organization? 

Mr.  WARBURG.  We  have  not  got  the  power. 

Mr.  GARNER.  Well,  why  did  you  not  ask  Congress  to  give  you  the 
the  power,  the  same  as  you  do  in  this  bill? 

Mr.  WARBURG.  We  do  not  ask  now  to  have  the  power  in  the  Fed- 
eral reserve  banks. 

Mr.  GARNER.  I  understand  you  do  not,  but  you  are  asking  for  the 
passage  of  the  bill,  and  I  am  asking  you  why  it  was  you  did  not  ask 
Congress  to  pass  a  bill  amending  the  Federal  reserve  act  and  enabling 
you  to  do  the  very  things  sought  to  be  done  in  this  bill  I 

Mr.  WARBURG.  Because  this  bill  gets  its  main  sources  of  strength 
in  its  power,  if  you  please,  to  guarantee  securities.  That  is  what  it 
•  Iocs,  in  effect.  This  bill  altogether  deals  with  securities  and  not  with 
commercial  paper. 

Mr.  GARNER.  Yes. 

Mr.  WARBI-RG.  The  Federal  reserve  system  is  primarily  based  upon 
liquid,  commercial  paper.  It  is  the  ultimate  source  of  the  reserve 
power  of  the  country,  arid  it  is  a  grave  responsibility  to  administer 
any  reserve  money.  Reserve  money  ought  to  be  available  all  the 
time.  When  we  invest  it.  we  ought  to  invest  it  so  as  to  always  have 
a  hold  on  it  so  \ve  can  always  get  it  back  when  the  bill  matures; 
in  lf>  or  30  or  <>()  or  DO  days  it  must  come  back.  AVhen  you  go  into 
the  security  market  there  is  no  such  thing.  But  you  do  not  want  me 
to  go  into  the  whole  theory  of  securities  versus  commercial  paper? 


38  WAR    FINANCE    CORPORATION. 

Mr.  GARNER.  No;  I  am  merely  trying  to  ascertain  why  it  was  that 
the  framers  of  this  bill  in  their  original  thought  did  not  select  the 
Federal  reserve  system  for  the  accomplishment  of  the  purpose  sought 
to  be  accomplished  in  this  bill.  Now,  this  bill  in  a  way  works  through 
the  Federal  reserve  system.  Outside  of  your  special  loans  and  your 
loans  to  savings  banks,  you  work  through  the  Federal  reserve  system 
by  rediscounting  their  paper,  do  you  not? 

Mr.  WARBURG.  Well,  I  hope  not. 

Mr.  GARNER.  The  bill  authorizes  that  to  be  done,  does  it  not  ? 

Mr.  WARBURG.  Yes.  When  I  say  I  hope  not,  I  mean  in  the  way 
you  put  it.  What  this  bill  will  do,  as  I  tried  to  make  clear  in  my 
statement,  is  that  it  will  put  life  back  into  the  security  market. 
This  bill  enables  power  companies,  utilities  companies,  municipali- 
ties, and  industrial  corporations  to  appeal  again  to  the  investor, 
where  to-day  they  can  not.  If  I  may  make  that  clear:  If  that  Michi- 
gan company  has  $10,000,000  of  maturities  and  wants  to  renew  them 
and  can  not  pay  them  off  and  has  got  to  renew  them,  and  appeals  to 
a  syndicate  of  bankers,  "  Will  you  take  this  $10,000,000  ?  "  those 
bankers  will  say.  "  We  can  not  do  it ;  we  can  not  get  the  holders  of 
those  maturities  to  take  the  five-year  bonds  of  the  Michigan  company 
at  this  time."  NOAV  there  steps  in  this  new  corporation  and  says. 
"All  right ;  is  this  banking  syndicate  ready  to  take  an  advance  from 
us  for  five  years  on  those  securities?"  "Yes."  "Then  we  will  give 
you  either  cash,"  or  probably  Ave  will  say.  "  Here  are  $10.000,000  of 
five-year  notes  of  that  corporation."'  The  banking  syndicate  can 
proceed  to  offer  them  to  the  maturing  bondholders,  and  for  the  bal- 
ance it  can  come  to  the  Federal  reserATe  banks,  if  the  banks  can  not 
carry  that  balance  themseh-es. 

So  yon  see  the  Federal  reserve  banks  Avill  deal  only  \vith  whatever 
is  unplaced,  while  under  the  Calder  bill  and  the  Aldrich-Yreeland 
bill  there  is  no  appeal  to  the  security  market  at  all.  because  you  do 
not  create  anything  that  Avill  go.  You  throAv  100  per  cent  of  the 
loan  on  the  Federal  ReserA-e  System  or  upon  the  Aldrich-Yreeland 
note-issuing  organization,  instead  of  getting  90  per  cent  into  the 
bond  market  first,  and  only  getting  the  balance,  Avhich  Avill  not  float, 
into  the  Federal  Reserve  System.  I  do  not  know  whether  that  is 
quite  clear  or  not. 

Mr.  GARNER.  The  main  point  I  Avanted  to  ascertain  was  why  you 
did  not  undertake  to  perform  the  duties  sought  to  be  performed 
under  this  bill  through  the  Federal  Reserve  System?  I  can  under- 
stand that  that  ought  not  to  be  the  permanent  law.  but  it  just  oc- 
curred to  my  mind  that  probably  the  results  sought  in  this  bill  could 
have  been  accomplished  by  an  amendment  to  the  Federal  reserve  act 
Avhich  Avould  have  expired  at  the  end  of  the  Avar. 

Mr.  WARBURG.  We  would  have  pulled  doAvn  our  reserves  much 
faster  in  that  Avay.  as  I  have  explained  to  you.  than  through  this 
method.  Moreover,  there  is  this  to  be  considered:  This  neAv  law 
provides  for  a  distinct  discrimination  between  essential  and  non- 
<•> cntial  things:  betAveen  things  that  ought  to  be  done  at  this  time 
and  things  that  ought  not  to  be  done  at  this  time.  If  you  permitted 
every  security  Avhich  has  been  issued  since  this  country  has  existed 
to  be  used  as  collateral  for  borroAving  with  the  Federal  reserve  banks, 
then  you  take  everything  that  has  been  issued  in  the  past  even  for 


WAE  FINANCE  CORPORATION.  39 

unnecessary  things  and  permit  them  to  come  in  as  collateral,  where- 
as now  we  will  only  permit  what  we  pass  upon  as  compatible  future 
issue.  So  we  expect  to  establish  some  very  important  "  buffer 
State?  "  for  the  protection  of  the  Federal  reserve  system,  and  that  is 
very  important. 

Mr.  GARNER.  Mr.  Warburg,  are  you  familiar  with  any  of  the  so- 
called  "  blue  sky  "  laws  of  the  various  States? 

Mi-.  WARBURG.  Not  very;  no. 

Mr.  GARNER.  What  is  your  opinion,  based  on  whatever  informa- 
tion you  have,  with  reference  to  the  object  of  those  laws?  Are  they 
not  to  curb  the  issuing  of  stocks  and  bonds  of  undesirable  corpora- 
tions or  uncertain  corporations? 

Mr.  WARBURG.  Yes;  I  think  so,  in  a  general  way. 

Mr.  GARNER.  Is  not  this  bill,  in  a  sense,  along  that  line,  creating 
n  governmental  office  for  the  purpose  of  determining  whether  cer- 
tain corporations  are  desirable  or  undesirable  during  the  time  of 
this  war? 

Mr.  WARBURG.  Yes. 

Mr.  GARNER.  What  would  you  say  about  a  governmental  policy 
of  that  kind  in  time  of  peace? 

Mr.  WARBURG.  I  should  think  it  was  undesirable  paternalism. 
I  should  say  also  that  if  this  bill,  which  I  strongly  urge,  were  offered 
in  peace  times  I  would  say  that  it  was  one  of  the  most  undesirable 
pieces  of  legislation  I  could  imagine;  but  we  have  to  do  a  lot  of 
things  at  this  time  which  would  be  bad  Government  policy  in  time 
of  peace. 

Mr.  GARNER.  You  probably  have  observed  that  since  the  begin- 
ning of  this  war,  even  before  this  country'  got  into  it,  Congress  has 
passed  many  laws  that  probably  it  would  not  have  passed  if  it  had 
not  been  for  the  condition  of  the  world,  especially  since  we  have 
entered  into  the  war:  and  nearly  all  the  laws  we  have  passed  have 
been  with  the  understanding  that  they  expire  at  the  end  of  the 
war,  and  I  think  the  country  ought  to  know  and  observe  that  the 
Congress  has  not  refused  to  give  the  executive  branch  of  the  Govern- 
ment any  essential  law  necessary  to  the  conduct  of  this  war. 

Mr.  WARBURG,  I  might  state  that  when  we  discussed  this  bill  in 
the  board  we  went  on  record  amongst  ourselves  that  we  favored 
the  general  plan  of  the  bill,  but  we  entered  upon  our  minutes  that  we 
did  it  on  account  of  the  emergency,  and  that  in  doing  so  we  did  not 
abandon  any  of  the  principles  which  we  have  espoused  for  normal 
times  and  which  would  run  counter  to  these  things. 

Mr.  GARNER.  Mr.  Warburg,  you  have  a  provision  in  this  bill  which 
authorizes  you  to  buy  and  sell  Government  bonds? 

Mr,  WARBURG.  Yes. 

Mr.  GARNER.  Do  you  hope  by  that  provision  to  put  the  Liberty 
bonds,  the  4  per  cent  bonds,  at  par? 

Mr.  WARBURG.  I  should  like  to  say  that  the  Secretary  of  the  Treas- 
ury is  really  the  proper  person  to  answer  that  question.  I  am  not 
the  War  Finance  Corporation.  I  am  simply  here  to  answer  ques- 
tions about  the  theory  of  the  bill. 

Mr.  GARNER.  Thsere  must  be  some  object  in  having  that  provision 
in  the  bill. 

Mr.  WARBURG.  I  will  be  glad  to  tell  you  what,  individually,  I 
think  of  it:  but  I  do  not  want  to  say  what  the  corporation  is  going 


40  WAR    FINAXCK    CORPORATION. 

to  do,  because  I  have  no  right  to  say  that.  The  Sec-rotary  of  the 
Treasury  was  very  clear  in  his  statement  to  the  Senate  committee 
that  he  does  not  expect  at  all  to  peg  the  market  for  Government 
bonds.  He  said  it  would  be  entirely  impossible  for  anybody  to  try 
to  keep  the  bonds  at  par  all  the  time  and  to  say  "  We  are  holding  the 
bag  for  everybody  who  wants  to  sell."  because  that,  as  a  matter  of 
fact,  would  make  the  Government  obligation,  which  is  a  25  or  a  30 
year  obligation,  a  demand  obligation,  and.  of  course,  the  Govern- 
ment could  not  do  that.  The  Government  is  selling  securities  all  the 
time  at  par.  and  it  could  not  undertake  to  buy  them  all  the  time  at 
par.  What  this  corporation  might  do.  however,  to  very  good  effect 
is  simply  to  have  a  very  strong  psychological  influence  upon  the 
market.  There  is  not  any  other  country  that  has  not  an  instru- 
mentality to  protect  its  own  bonds.  When  we  have  completed  our 
liberty-loan  sales  and  have  filled  every  hole  that  we  can  find  and 
every  future  hole,  because  we  ask  people  to  dig  that  hole  in  ad- 
vance— 

Mr.  GARNER  (interposing).  If  you  undertook  by  this  provision  in 
the  bill  to  maintain  the  market  at  par  it  would  merely  transfer  these 
bonds  from  a  circulating  medium  to  be  cashed  at  the  Treasury  to  the 
stock  exchange  in  New  York? 

Mr.  WARBURG.  I  did  not  quite  catch  that. 

Mr.  GARNER.  If  by  this  provision  in  the  bill  this  corporal  ion  should 
undertake  to  maintain  these  bonds  on  the  market  at  par,  we  will  say 
the  New  York  Stock  Exchange,  it  would  merely  transfer  from  the 
Treasury  the  circulating  medium,  as  it  were,  the  cash  value  of  it. 
to  the  New  York  Stock  Exchange? 

Mr.  WARBURG.  Oh.  yes. 

Mr.  GARNER.  If  you  could  go  to  New  York  and  get  100  cents  on  the 
dollar,  of  course,  it  would  be  no  use  to  come  down  to  the  Treasury 
and  hand  in  your  bond  and  get  the  money,  and  the  result  of  the  effort 
would  be  to  make  this  the  par  value  and.  you  might  say.  a  circulating 
medium  to  be  cashed  at  the  Treasury  for  gold  at  any  time  which.  I 
think,  is  simply  impossible  to  think  about. 

Mr.  WARBURG.  Impossible.  The  Secretary  will  be  here  to-morrow 
and  if  you  ask  him  the  question  I  think  he  will  be  very  emphatic  in 
saying  that  that  is  not  his  intention  at  all. 

Mr.  GARNER.  I  was  merely  asking  that  to  find  out  what  there  was 
to  it.  Now.  you  say  it  is  psychological,  and  I  agree  with  you.  Sup- 
pose this  corporation  should  on  Monday  decide  to  bid  for  the  bonds, 
and  being  in  the  market  for  those  bonds  the  bonds  would  naturally 
go  up.  Now,  suppose  it  should  become  supplied  with  all  the  bonds  it 
.desires  and  then  cease  to  buy  and  they  go  down  and  are  lower  on 
Saturday  ? 

Mr.  WARBURG.  The  psychological  effect  I  had  in  mind  was  this: 
That  the  people  in  general  and  the  people  who  are  not  well  inclined 
in  particular  would  not  have  the  certainty  that  here  is  a  market 
which  is  absolutely  unprotected  and  a  market  which  is  without  any 
purchasing  power,  because  when  we  have  completed  our  liberty-loan 
sales  there  is  no  more  purchasing  power,  because  we  have  taken'  every 
cent  that  will  come  during  the  following  two  or  three  months.  So 
everybody  knows  that  he  can  be-jin  to  sell  these  bonds  short  and  find 
an  entire  unprotected  market.  That  is  what  I  mean  when  I  sav  there 


WAR    FINANCE    CORPORATION.  41 

is  a  psychological  effect.  It  is  very  important  that  there  should  be 
somebody  to  protect  the  market. 

Mr.  GARNER.  I  merely  wanted  to  direct  your  attention  to  the  fact 
that  in  ca>e  the  market  should  go  up  at  some  time  and  this  corpora- 
tion should  be  in  the  market  for  bonds  and  then  at  another  period 
it  should  go  down,  there  might  be  some  criticism  throughout  the 
country,  or  rather  an  inquiry  as  to  whether  this  corporation  was  un- 
dertaking at  one  time  to  put  the  price  of  bonds  up  and  at  another 
time  neglecting  the  market,  so  that  they  might  go  down.  I  wanted  to 
merely  throw  out  that  suggestion  to  see  what  your  views  might  be 
with  reference  to  the  effect  vtpon  the  entire  country  of  having  a 
governmental  corporation  here  authorized  to  put  up  or  down,  we 
might  say,  the  price  of  bonds. 

Mr.  WARBURG.  Well,  you  would  hardly  expect  that  they  would 
«ver  put  it  down. 

Mr.  GARNER.  I  mean  by  that  not  intentionally  or  not  necessarity 
by  their  individual  effort,  but  if  they  were  in  the  market  this  week 
for  bonds  and  next  week  they  should  decide  to  go  out  of  the  market 
and  the  liberty  bonds  had  no  support  in  the  market,  naturally,  the 
bonds  would  go  down. 

Mi\  WAHIH  KG.  I  should  think  the  corporation  would  do  just  as 
little  as  it  possibly  could  and  would  consider  itself  only  an  emergency 
institution  also  in  that  respect  to  protect  the  market  when  it  was 
necessary  and  take  away  from  the  market  blocks  of  bonds  from 
people  who  have  got  to  sell  and  who  otherwise  might  spoil  the  mar- 
ket. Naturally.  I  think  we  have  got  to  be  prepared  to  have  some 
criticism  from  time  to  time.  People  may  become  disappointed  and 
there  will  be  some  kicks,  I  have  no  doubt,  but  I  think  the  advantage 
is  so  much  greater  in  getting  the  protection  for  the  market  that  we 
have  to  take  the  danger  of  criticism  into  the  bargain. 

Mr.  GARNER.  I  was  only  afaid  of  what  the  effect  of  the  criticism 
might  be  upon  the  administration  of  this  law  in  case  the  market 
should  go  up  and  down  and  they  should  attribute  it  to  the  efforts  or 
want  of  efforts  on  the  part  of  this  corporation.  I  believe  that  is  all, 
Mr.  Chairman. 

Mr.  MOORE.  Mr.  Warburg,  following  up  the  suggestions  of  Mr. 
Garner.  I  would  like  to  ask  whether  the  thought  of  those  advancing 
this  bill  was  to  make  this  War  Finance  Corporation  a  permanent 
institution? 

Mr.  WARIH  KG.  The  law  provides,  Mr.  Moore,  that  this  institution 
shall  stop  doing  business  inside  of  six  months  after  the  conclusion  of 
peace  and  then  from  that  time  on  shall  proceed  at  one?  to  liquidate. 

Mr.  MOORK.  In  your  statement  you  referred  to  the  fact  that  we 
ought  not  to  circumscribe  its  influence,  and  you  stated  you  hoped  its 
influence  would  be  very  much  like  that  of  the  Federal  reserve  bank. 
The  Federal  reserve  bank  is  certainly  a  permanent  institution,  is  it 
not '( 

Mr.  WARIH  KG.  I  did  not  mean  to  convey  that  impression  at  all. 
I  would  like  to  make  it  as  emphatic  as  I  can  that  I  think  this  is  only 
an  emergency  institution  for  this  war.  and  that  it  would  be  a  very 
unfortunate  thing  if  an  institution  of  this  kind  were  to  be  permitted 
to  exist  after  the  conclusion  of  peace:  and  that  is  one  of  the  reasons 
why  I  think  these  powers  are  bettered  lodged  in  the  corporation  than 
in  the  Government,  because  the  corporation  automatically  ceases  to 


42  WAR    FINANCE    CORPORATION. 

have  power  to  operate,  yet  upon  the  conclusion  of  peace  the  Govern- 
ment could  go  on. 

Mr.  MOORE.  But  the  machinery  provided  in  the  first  and  second 
sections  of  the  bill  contemplates  a  rather  long  and  enduring  or- 
ganization. For  instance,  it  is  provided  that  it  shall  have  succession 
for  a  period  of  10  years:  then  the  manner  of  electing  officers  and 
directors  provides  for  terms  of  office  which  looks  as  if  it  was  in- 
tended to  carry  this  business  on  for  a  long  time. 

Mr.  WARBURG.  If  you  prefer  it  I  think  you  could  change  it  to 
say:  the  duration  of  the  corporation  shall  be  just  as  long  as 
required  to  liquidate  its  affairs  after  the  conclusion  of  the  war.  I 
think  if  you  would  start  to  write  this  bill  you  would  find  yourself 
in  the  same  predicament.  You  have  got  to  give  that  corporation  a 
certain  length  of  life,  because  it  will  make  five-year  loans  and  those 
loans  may  possibly  not  be  paid  immediately  after  the  conclusion  of 
peace,  and  you  will  have  to  go  on  until  you  liquidate  them;  but 
you  will  find  that  there  is  a  very  clear  clause  there  which  provides 
that  immediately  upon  the  conclusion  of  peace  the  corporation  ceases 
to  have  power  to  do  business. 

Mr.  MOORE.  Yes;  I  am  familiar  with  that  provision,  but  section  0 
provides  that  the  corporation  shall  have  the  power  to  hold  or  dispose 
of  real  estate  and  to  sue  and  be  sued,  and  it  generally  prepares  for 
what  might  be  regarded  as  a  rather  long  life.  Now,  when  you  begin 
to  take  over  real  estate,  it  looks  as  if  you  were  going  to  have  a 
long  existence. 

Mr.  WARBURG.  Would  it  not  be  rather  a  prolonged  death,  because 
you  can  not  do*  any  business  any  more  and  you  would  hold  only 
certain  investments  that  you  may  not  have  been  able  to  dispose  of, 
but  I  should  think  the  directors  would  make  every  effort  to  get  rid 
of  the  expensive  management  and  everything  also  as  soon  as  pos- 
sible. The  clause  I  have  in  mind  is  at  the  end  of  section  1 : 

In  no  event  shall  the  corporation  exercise  any  of  the  powers  conferred  by 
this  act,  except  such  as  are  incidental  to  the  successful  liquidation  of  its 
assets  and  the  successful  winding  up  of  its  affairs  after  six  months  after  the 
termination  of  the  war,  the  date  of  such  termination  to  be  fixed  by  proclama- 
tion of  the  President  of  the  United  States. 

Mr.  MOORE.  In  just  what  way  would  you  dispose  of  all  the  min- 
utia>  provided  for  in  the  succeeding  sections,  as,  for  instance,  the 
holding  of  real  estate,  the  making  of  contracts,  which  undoubtedly 
would  be  for  a  term  of  years,  some  of  them :  how  would  that  business 
be  disposed  of? 

Mr.  WARBURG.  The  corporation  can  not  go  on  doing  any  business, 
but  like  any  corporation  in  course  of  liquidation,  you  have  to  carry 
it  on  until  you  dissolve  it. 

Mr.  MOORE.  But  if  it  made  contracts  for  a  period  of  veal's,  and  if  it 
held  real  estate  which  had  to  be  disposed  of  at  some  subsequent 
period,  and  was  not  what  you  call  a  liquid  asset,  that  would  contem- 
plate a  long  existence  or  at  least  the  transfer  of  the  business  to 
some  other  corporation  which  would  have  similar  powers. 

Mr.  WARBURG.  If  you  have  the  power  only  to  provide  your  money 
by  securities  which  can  not  run  longer  than  five  years,  does  it  not 
stand  to  reason  that  you  will  be  careful  not  to  go  into  obligations 
extending  over  that  period? 


WAR    FINANCE    CORPORATION.  43 

Mr.  MOORE.  This  is  what  I  am  getting  at :  The  Federal  reserve 
bank  is  undoubtedly  a  fixed  institution,  and  some  of  us  are  inclined 
to  think  it  is  as  close  to  a  central  bank  as  ever  the  United  States 
Bank  was  in  its  day. 

Mr.  WARBI  RG.  Xone  of  this  should  ever  go  into  the  Federal  re- 
serve banks.  Indeed,  all  that  we  provide  now  is  that  during  the  war. 
and  as  long  as  these  obligations  are  outstanding,  the  Federal  reserve 
banks  may  discount  the  paper  security  of  thesa  banks.  We  have  not 
given  the  Federal  reserve  banks  any  larger  powers  than  that.  If 
this  corporation  wishes  to  go  out  of  business,  there  will  not  be  any 
other  instrument  that  can  do  this  business.  I  am  very  much  opposed 
to  having  any  of  these  powers  go  into  the  Federal  Reserve  System. 

Mr.  MOORE.  You  make  that  statement  as  a  financier? 

Mr.   AYARBURG.   Yes. 

Mr.  MOORK.  Mr.  Garner  asked  you  about — 

Mr.  WARBURG  (interposing).  I  want  to  be  quite  clear  in  regard  to 
that  proposition.  The  rediscounts,  as  proposed,  I  am  in  favor  of. 
But  the  power  to  grant  loans  on  bonds  and  stocks,  and  make  direct 
loans  to  corporations  in  need,  that  I  do  not  want  the  Federal  reserve 
banks  to  enjoy. 

Mr.  MOORE.  That  certainly  would  have  a  very  unfortunate  effect 
upon  the  existing  banking  institutions  throughout  the  country,  would 
it  not '( 

Mr.  WARBURG.  If  it  were  done,  or  not  done  \ 

Mr.  MOORE.  If  this  corporation  were  to  continue  to  do  a  direct  dis- 
count business  with  the  public. 

Mr.  WARBT  RG.  It  would  be  more  than  a  discount  business,  because 
it  would  be  buying  securities;  it  would  be  making  permanent  five 
year  loans.  If  we  were  to  put  that  power  into  the  Federal  Reserve 
System,  we  would  destroy  it. 

Mr.  MOORE.  If  a  man  wanted  to  borrow  money  and  could  initiate 
his  transaction  through  the  War  Finance  Corporation,  he  might  not 
go  to  his  State  bank  or  his  local  or  Federal  band. 

Mi-.  WARBURG.  If  this  corporation  were  going  to  take  the  place  of 
members  banks,  in  normal  times? 

Mi'.  MOORE.  Yes. 

Mr.  WARBURG.  That  would  be  very  unfortunate. 

Mr.  MOORE.  Does  not  this  bill  provide  that  this  corporation  may 
do  business  directly  with  a  borrower? 

Mr.  WARBURG.  The  preamble  says  that  in  exceptional  cases  it  may 
be  done,  but  I  hope  that  these  exceptional  cases  will  be  but  a  very, 
very  small  percentage. 

Mr.  MOORE.  Those  exceptional  cases  would  be  wholly  within  the 
discretion  of  the  Secretary  of  the  Treasury,  and  the  board  cooperat- 
ing with  him? 

Mr.  WARBURG.  The  board  of  directors '( 

Mr.  MOORE.  Yes. 

Mr.  WARBURG.  Yes. 

Mr.  MOORK.  They  would  have  power  to  say.  in  almost  any  case, 
whether  the  money  should  or  should  not  be  loaned  > 

Mr.  WARBURG.  I  do  not  think  there  would  be  any  objection  to  put- 
ting a  limitation  on  that,  to  say  that  no  more  than  5  or  10  per  cent 


44  WAR    FINANCE    CORPORATION. 

of  tin1  business  done  by  the  corporation  shall  be  done  in  that  direct 
manner. 

Mr.  MOOHK.  That  question  comes  up  in  connection  with  the  ordinary 
banking  business  of  the  country.  There  are  some  bankers  who  were 
not  wholly  in  favor  of  going  into  the  Federal  Reserve  System.  There 
are  some  who  would  hesitate  about  indorsing  a  law  which  proposed 
to  take  away  what  business  remained  to  them. 

This  proposition.  a£  I  read  the  testimony  of  the  Secretary  of  the 
Treasury  and  your  testimony,  would  mean  that  if  I.  as  a  contractor, 
making  war  munitions,  or  if  I.  as  a  farmer  or  a  representative  of  a 
farmers'  association,  desiring  to  get  money  from  this  corporation, 
brought  sufficient  influence  to  bear,  I  might  get  it  from  the  corpora- 
tion without  going  to  my  bank. 

Mr.  AYARBURG.  Let  me  give  you  what  I  believe  to  be  the  meaning 
of  this  paragraph. 

If  we  left  it  out.  there  would  be  two  weaknesses  in  the  law.  One 
would  be  that  a  hue  and  cry  would  be  raised  that  we  are  delivering 
the  country  into  the  hands  of  the  bankers.  It  would  be  said  that  the 
Government  is  willing  to  provide  for  a  tremendous  amount  of  money 
which  would  be  absolutely  under  lock  and  key.  and  nobody  could 
get  it  out  except  a  man  who  has  a  bank  to  stand  sponsor  for  him. 

It  would  not  be  right,  either,  to  have  it  that  way.  because.  a$  we 
have  seen  in  the  past,  it  might  be  feared  by  some  that  there  might 
be  a  ring  of  bankers  who  could  keep  deserving  people  out. 

For  that  reason  it  is  necessary  to  have  what  we  might  call  an 
'"  open-market  clause,"  which  is  practically  the  same  as  the  open- 
market  clause  in  the  Federal  reserve  act. 

The  other  is  that  there  may  be  possibly  some  industrial  propo- 
sitions which  might  be  really  essential  for  the  well  being  of  the 
country  at  this  time,  but  which  the  banks  might  not  be  willing  to 
guarantee,  because,  let  us  assume,  the  contracts  are  too  short.  They 
expire  after  a  short  while,  and  a  big  plant  has  to  be  created,  and  it 
may  be  considered  bad  business  for  a  bank  to  finance  that. 

For  such  cases  it  would  be  very  important  that  this  institution, 
which  represents  the  Government,  could  be  free  to  say,  "We  will 
step  in  and  help  them  out  in  that  situation/'  although  if  must  he  the 
intention  of  this  war  corporation  to  deal  as  much  as  possible 
through  banks  and  bankers. 

If  you  will  consider  how  the  corporation  is  going  to  act.  you  will 
see  that  for  its  own  sake  it  can  not  act  in  anv  other  wav. 

Here  are  five  men  who  will  be  swamped  with  requests  for  loans 
from  all  parts  of  the  country.  How  is  it  possible,  even  with  the 
organization  of  the  12  Federal  reserve  banks  and  their  branches, 
through  whom  they  can  keep  advised,  to  investigate  and  examine 
every  industrial  proposition  of  $100,000  and  not  make  mistakes? 

Their  only  protection  is  to  act  through  banks  and  bankers,  prima- 
rily, and  put  that  test  upon  a  cash  proposition  that  if  the  people, 
locally,  are  willing  to  stand  behind  it  and  guarantee  it,  then  the 
Government  is  willing  to  provide  the  funds,  but  not  otherwise. 

Mr.  MOORE.  I  think  it  is  in  the  bill  that  it  is  to  be  done  primarily 
by  the  banks,  and  they  have  to  come  to  the  corporation  and  obtain  it's 
approval  before  the  loan  is  consummated. 

But  provision  is  made  that  if  anyone  does  not  get  that  help  from 
a  bank  and  does  come  to  this  corporation  with  what  seems  a  war 


WAB    FINANCE    C'OHPOKATION.  45 

necessity,  he  can  get  :l  loan,  even  though  the  bunks  decline  to  lend  the 
money. 

That  brings  up  the  case  of  the  Michigan  corporation  which  the 
Secretary  of  the  Treasury  referred  to  yesterday,  and  which  Mr.  Ford- 
ney  adverted  to  this  morning.  That  was  the  case  of  a  power  com- 
pany which  was  unable  to  obtain  necessary  financial  support  to  con- 
tinue its  work  to  furnish  power  to  the  trolley  lijies,  to  public  utilities, 
or  to  mines.  It  brings  up  this  question:  If  the  corporation  wishes 
to  issue  stock  or  the  local  banks  that  are  familiar  with  the  situation 
decline  to  make  further  loans,  either  for  maturing  securities,  or  for 
any  other  purpose,  would  it  not  be  within  the  province  of  the  \Var 
Finance  Corporation  to  loan  that  company  money,  notwithstanding 
that  its  request  had  been  rejected  by  those  who  are  most  familiar 
with  its  business? 

Mr.  WARBURG.  If  I  were  on  the  board  of  directors,  I  would  say  if 
it  were  plainly  a  commercial  proposition,  having  no  relation  to  the 
war.  where  the  local  banks  are  unwilling  to  stand  behind  the  securi- 
t  ies.  that  the  corporation  should  not  do  it  either.  If  the  vital  interests 
of  the  country  at  this  time  are  involved.  I  would  judge  the  case  dif- 
ferently. 

Mr.  MOORE.  1  do  not  know  that  I  have  in  mind  the  company  which 
the  Secretary  of  the  Treasury  referred  to,  but  I  have  in  mind  a  large 
corporation  which  might  have  answered  his  description,  which  did 
issue  more  stock  and  bonds  than,  perhaps,  its  assets  warranted.  Yon 
might  call  them  paper  issues,  or  water  issues.  The  banks  were 
familiar  with  the  situation,  and  they  went  as  far  as  they  thought  it 
was  wise  to  go  in  loaning  money  to  that  particular  corporation.  Still 
the  business  being  done  by  the  corporation,  if  it  could  continue  busi- 
ness, would  probably  be  valuable  in  time  of  war.  In  that  case,  where 
things  had  practically  reached  a  bankruptcy  basis,  would  this  War 
Finance  Corporation  lend  money  to  such  an  enterprise  to  keep  it 
going,  on  the  ground  of  war  necessity,  or  on  the  ground  of  that  com- 
pany being  essential  at  this  time? 

Mr.  WARBURG.  That  is  a  case  that  would  have  to  be  dealt  with  on 
its  merits,  and  the  facts  in  that  particular  case  would  have  to  be 
taken  into  consideration. 

Mr.  MOORE.  The  War  Finance  Corporation  would  have  power  to 
lend  money  in  a  case  of  that  kind  ( 

Mr.  WARBUfiG.  I  think  the  power  is  there,  but  there  is  a  grave  re- 
sponsibility resting  on  these  men  to  guard  against  abuses,  and  they 
have  to  exercise  common  sense. 

Mr.  MOORE.  In  other  words,  a  dead  horse  might  be  put  on  its  feet 
if  it  could  show  that  it  had  a  war  value  at  this  time? 

MV.  WARBURG.  If  you  could  ride  on  a  dead  horse  to  battle,  it  would 
be  put  on  its  feet. 

Mr.  MOORE.  I  am  using  an  extreme  case  for  the  purpose  of  illustra- 
tion. The  only  way  to  get  information  is  to  ask  questions,  and 
these  questions  are  not  intended  to  be  objectionable* 

Mr.  WARBURG.  Of  course  not. 

Mr.  MOORE.  It  is  a  question  of  the  integrity  of  the  proposition. 
Why  would  it  not  be  sufficient,  instead  of  creating  this  newr  organi- 
zation, with  all  its  officers  and  its  headquarters  and  all  its  clerks,  all 
the  other  paraphernalia  necessary — why  would  it  not  be  sufficient  to 


46  WAR   FINANCE    CORPORATION. 

give  the  sanction  of  law  to  some  such  body  as  your  capital'issues  com- 
mittee in  the  Federal  Reserve  Board  ? 

Mr.  WARBURG.  That  is  only  a  negative  means  of  relief.  What  we 
do  in  our  committee  is  to  prevent  people  from  raising  money  where 
they  should  not.  but.  wre  can  not  provide  any  relief  where  we  find 
that  things  are  compatible  with  the  public  interest  and  where  the 
machinery  for  providing  the  money  has  broken  down. 

Mi-.  MOORE.  Where  your  capital  issues  committee  puts  its  stamp  of 
approval  upon  certain  securities,  they  go.  do  they  not  ? 

Mr.  WARBURO.  Xo:  they  do  not:  not  a  bit  of  it.  You  may  put  it 
the  other  way.  Securities  that  we  do  not  approve  do  not  go.  But 
the  mere  fact  that  we  say  this  is  compatible  with  the  public  interests 
does  not  mean  that  it  is  a  good  security.  We  are  very  particular  in 
putting  it  into  our  letters  of  approval — we  do  not  even  call  it  ap- 
proval— that  our  permit  does  not  mean  that  there  has  been  any 
investigation  in  regard  to  the  intrinsic  merits  of  the  proposition.  It 
merely  involves  the  question  as  to  whether  or  not  the  thing  is  com- 
patible with  the  public  interests  at  this  time. 

Mr.  MOORE.  If  your  committee,  backed  by  the  Secretary  of  the 
Treasury,  were  to  say.  "We  do  not  approve  of  this  issue  at  this 
time."  it  could  not  be  sold,  could  it '. 

Mr.  WARBURG.  It  would  probably  not  be  sold,  but  that  would  not 
mean  that  you  can  sell  it  with  our  approval. 

Mr.  MOORE.  Would  not  that  affect  the  sale  of  municipal  or  State 
securities  ? 

Mr.  WARBURG.  I  hope  so. 

Mr.  MOORE.  That  is  to  say,  if  the  authorities  of  a  State  or  a  munici- 
pality were  to  say  to  you.  "We  would  like  to  make  this  issue  for 
waterworks,  or  for  State  roads,  or  for  a  public  building."  and  you 
said  publicly  you  felt  that  such  an  issue  would  not  be  compatible 
with  the  public  interests,  it  is  very  doubtful  whether  the  securities 
market  would  touch  that  issue  at  all,  is  it  not  ? 

Mr.  WARBURG.  That  is  correct;  the  securities  market  would  prob- 
ably not  take  them. 

Mr.  MOORE.  Then  you  have  almost  absolute  power  now.  even  in 
your  volunteer  committee. 

Mr.  WARBURG.  To  prevent:  but  we  have  no  power  to  assist. 

MT-.  MOORE.  My  point  is  that,  apparently,  for  the  work  you  are 
undertaking  to  do  you  have  just  as  effective  an  organization  now  as 
you  would  have  if  you  had  the  new  War  Finance  Corporation, 
which  is  contemplated  by  this  bill. 

Mi1.  WARBURG.  For  the  work  our  capital  issues  committee  is  under- 
taking now.  we  would  probably  have  the  same  power  that  we  have 
to-day,  except  that  it  would  be  a  great  he!])  if  the  power  of  law 
could  be  placed  behind  it.  but  that  does  not  cover  an  equally  im- 
portant feature,  which  is  the  relief  to  savings  banks,  relief  to  indus- 
trial corporations,  and  relief  to  the  securities  market  in  general. 

Mr.  MOORE.  Then  the  purpose  of  this  bill  must  be  to  obtain  a 
grouping  of  funds  for  the  purpose  you  have  indicated,  to  give  assist- 
ance in  certain  cases  during  the  war. 

Mr.  WARBURG.  That  is  right. 

Mr.  MOORE.  That  is  a  function  you  do  not  exercise  now  us  a  capi- 
tal issues  committee,  or  a  Federal  Reserve  Bank? 

Mr.  WARBURG.  That  is  correct. 


WAR    FINANCE    CORPORATION.  47 

Mi-.  MOORE.  The  real  purpose  is  to  group  money,  to  gather  it 
together,  with  a  view  to  saying,  for  instance,  to  the  American  Inter- 
national Corporation,  which  is  building  the  Hog  Island  shipyard. 
If  this  is  a  war  proposition  and  it  is  approved,  we  will  loan  you  the 
money. 

Mr.  WARBURG.  We  might. 

Mr.  MOORE.  That  would  be  Federal  money,  after  all? 

Mr.  WARBURG.  Not  exactly,  because  we  raise  it  on  the  credit  of 
the  corporation  although  indeed  we  have  the  power  of  the  Govern- 
ment behind  it.  and  the  stock  ownership  of  the  United  States. 

Mr.  MOORE.  But  with  the  sympathy  of  the  Federal  reserve  banks, 
which  you  would  undoubtedly  have  under  this  bill,  you  would  so 
group  the  funds  of  this  country,  both  the  deposits  in  the  Federal 
reserve  banks  and  the  Federal  resources  appropriated  by  this  bill  and 
raised  under  it — you  would  have  them  so  grouped  that  it  would  be 
within  the  power  of  the  corporation  to  assist  a  company  in  Penn- 
sylvania or  to  refuse  to  assist  a  corporation  in  Illinois? 

Mr.  WARBURG.  That  is  the  object  of  the  law. 

Mi-.  O'SiiAi  NKSSY.  What  kind  of  a  letter  do  you  give  the  security 
that  seeks  the  approval  of  this  committee  now  ? 

Mr.  WARBURG.  I  have  it  here:  it  says: 

Having  inquired  into  the  purpose  of  the  issue  above  described,  we  are  of 
opinion  that  the  sale  of  the  said  bonds  is  not  incompatible  with  the  interests 
jof  the  United  States. 

This  finding  constitutes  no  approval  of  such  issue  as  regards  its  merits. 
security,  or  legality  in  any  respect. 

In  any  public  offer  or  advertisement  of  the  said  issue  this  letter  must  be 
incorporated  in  full. 

Mr.  O'SiiAiXKssY.  Is  I  hat  used  by  those  who  issue  the  securities  > 

Mr.  WARBURG.  Yes. 

Mr.  O'SiiAUNESsY.  Do  they  stamp  that  upon  them? 

Mr.  WARBURG.  Yes.    They  print  it  in  the  prospectus. 

Mr.  O'SiiAUNKSsr.  When  you  spoke  about  the  mining  companies 
in  the  West  that  are  not  responsive  to  the  invitation  of  the  committee. 
I  believe  you  did  not  indicate  how  large  that  interest  is  and  how 
extensively  they  issue  securities.  I  wish  you  would  indicate  how 
large  their  interest  is  and  how  extensive  the  issues  of  securities  are. 

Mr.  WARBURG.  I  could  not  tell  you,  in  exact  figures.  They  adver- 
tise, as  a  rule,  in  pretty  glowing  terms.  It  is  always  the  best,  the 
biggest,  and  the  greatest,  and  we  have  turned  over  some  of  them  to 
the  Attorney  General  to  see  how  far  we  can  stop  such  advertise- 
ments. So  far  we  are  dealing  with  issues  of  $500,000  or  above. 

Mr.  O'SIIAUNKSSY.  Do  you  believe  you  should  confine  yourself 
to  that  figure,  or  do  you  believe  it  would  be  for  the  public  good  to 
come  down  to  $100,000? 

Mr.  WARBURG.  We  hope  very  scon  to  come  down  to  $100,000  as 
far  as  municipal  issues  are  concerned,  because  the  greatest  waste-  is 
in  municipal  issues,  and  there  are  a  great  many  small  <  nes  that  slip 
through. 

Mr.  O'SIIAUNESSY.  What  is  the  figure  generally  used  in  the  mining 

business  ? 

Mr.  WARBURG.  It  is  less  than  $500.000.  and.  therefore,  they  escape 

us  so  far. 

Mr.  O'SiiAUNESSY.  How  is  the  public  good  to  be  served  in  stop- 
ping money  being  invested  in  worthless  enterprises  ?  I  am  trying 


48  N'AK    FINANC'K    CORPORATION. 

to  show  that  a  good  effect  might  How  from  the  work  of  this  cor- 
poration in  saving  the  public  and  in  enabling  them  to  put  it  into 
better  investments. 

•  Mr.  WAKIH-HG.  We  hope  to  go  down  to  ft>50.000  and  over  as  far 
as  industrial  concerns  are  concerned.  We  have  got  to  go  slow,  be- 
cause the  amount  of  material  that  is  submitted  to  us  is  so  large. 

Mr.  O'SiiAt  NKSSY.  As  long  as  your  committee  operates  without 
the  sanction  of  law.  merely  as  a  volunteer  committee,  responding  to 
rhe  invitation  of  the  Secretary  of  the  Treasury,  have  you  the  power 
to  compel  any  submission  of  this  information  by  these  exploiters? 

Mr.  WABBUBO.  No. 

Mr.  O'SiiAi  NKSSY.  But  with  the  sanction  of  law.  such  as  I  have 
indicated  in  my  first  question,  you  could  compel  these  people  to 
make  application  to  you? 

Mr.  WARBI  m;.  Yes:  the  law  prescribes  a  fine  if  anybody  does  nor 
submit  it.  We  have  not  got  that  now. 

Mr.  O'SHAUNKSSV.  Do  you  believe  that  would  be  a  good  thing 
for  the  public  ? 

Mr.  WARBURG.  I  think  so;  if  we  had  the  power  to  impose  a  penalty. 

Mr.  O'SnAUNESSY.  Do  you  believe  it  would  be  a  good  thing  for  the 
public,  in  times  of  peace  even — I  mean  dealing  with  such  companies 
as  that  ( 

Mr.   WAKBURG.  That    is  a   very  large  question.     That   is  done  in 
Europe.     In  France  and  in  Germany  they  have  Government  commis-. 
sions  that  pass  on  every  prospectus  that  is  intended  to  be  published 
in  regard  to  the  sale  of  securities.     But  that  brings  about  a  degree  of 
paternalism  that  I  do  not  believe  in. 

Mr.  O'SHAUNESSY.  But  there  might  be  extreme  cases  in  which 
some  intervention  might  be  justifiable?  As  I  recollect  it.  it  runs 
into  millions  of  dollars:  millions  of  dollars  are  extracted  from  a 
gullible  public  every  year  by  these  people. 

Mr.  WARBURG.  So  it  is.  There  is  no  doubt  about  it.  I  think  the 
matter  had  better  be  covered  by  having  some  legislation  that  pun- 
ishes the  sale  of  such  securities  upon  a  misstatement  or  incomplete 
statement,  because  these  men  almost  all  misstate  the  facts. 

Mr.  OLDFIELD.  A  good  many  of  the  States  have  laws  in  regard  to 
that  now.  It  might  be  left  to  the  States,  might  it  not  ? 

Mr.  WARBURG.  If  they  would  enforce  the  laws. 

Mr.  O?SHAUNESSY.  Will  you  indicate  to  us  just  what  the  operation 
is  when  you  issue  this  certificate?  How  do  you  invite  these  state- 
ments or  call  for  these  statements?  Is  it  by  advertisement  or  by 
letter? 

Mr.  WARBURG.  This  matter  has  been  widely  published,  so  that 
everybody  in  the  United  States  knows  about  it  now. 

M*r.  O'SiiAUNKssY.  It  is  a  matter  of  general  knowledge  now  among 
the  investment  companies? 

Mr.  WARBURG.  Every  good  citi/en  knows  now  that  he  has  to  apply, 
and  I  think  the  way  we  are  going  to  control  it  is  more  or  less  through 
the  associations  of  the  investment  bankers,  with  whom  we  are  getting 
in  touch  now.  I  gave  you  the  illustration  of  the  New  York  Stock  Ex- 
change, which  does  not  list  anything  which  has  not  been  approved. 
Through  these  investment  bankers'  associations  I  think  we  are  going 
to  control  the  more  important  issues.  The  difficulty  is  with  the 


WAR   FINANCE    CORPORATION.  49 

smaller  ones,  which  are  not  offered  at  all  for  public  sale,  but  which 
are  offered  by  means  of  circulars  and  appeals  to  the  investors  direct. 

Mr.  O'SHAUXKSSY.  What  is  the  life  of  the  corporation's  bonds? 

Mr.  WARBURG.  The  longest  are  five-year  bonds  and  the  shortest  are 
one-year  bonds. 

Mr.  O'SirAuxKssv.  You  denominate  them  all  as  short-term  bonds? 

Mr.  AVARBI  R<;.  Yes. 

Mr.  LOXGWORTH.  Let  me  see  if  I  can  summarize  the  items  in  favor 
of  this  matt,  r  in  simple  language. 

In  the  first  place,  we  admit  it  is  desirable  to  lend  credit  to  con- 
cerns which  are  doing  good  work  for  the  war.  The  Federal  system 
has  not  that  power  now.  because  they  can  not  loan  money  on  secur- 
ities: they  can  only  loan  money  on  liquid  paper. 

Mr.  WARBURG.  That  is  right. 

Mr.  LOXGWORTH.  Therefore,  as  the  Secretary  told  us  yesterday,  our 
Federal  system  has  not  the  power  that  the  English  system  has,  with  a 
central  bank,  to  loan  on  credits? 

Mr.  WAUIU  RG.  That  is  correct. 

Mr.  LOXGWORTII.  You  think  it  would  not  be  advisable  to  confer  this 
power  on  the  Federal  system  by  legislative  act,  because  it  would  tend 
to  deplete  the  reserves  in  the  Federal  banks  and  that  the  corporation 
.system  would  be  more  convenient? 

Mr.  WARBURG.  Yes.  It  would  not  only  deplete  the  reserves,  but  I 
think  it  would  destroy  the  credit  of  the  Federal  Reserve  System.  If 
the  banks  issued  five-year  notes  of  their  own,  all  the  things  that  are 
necessary  here,  it  would  destroy  the  character  of  the  reserve  banks. 
They  would  cease  to  be  liquid,  and  I  think  you  would  have  a  terrible 
condition  of  distress.  I  think  it  would  be  the  end. 

Mr.  LOXGWORTH.  Why  is  there  such  a  marked  difference  between 
our  system  and  the  English  system? 

Mr.  WARBURG.  In  England  they  did  much  more  than  simply  make 
loans  on  credit.  The  treasury  stepped  in  and  guaranteed  all  stock- 
exchange  loans  at  the  beginning  of  the  war.  They  were  given  power 
to  do  almost  anything,  and  they  did  it  there.  They  guaranteed  ac- 
ceptances, declared  moratoria,  closed  stock  exchanges,  etc.  So  they 
did  in  other  countries,  and  in  some  cases  made  loans  and  issued  notes 
too  freely,  and  with  bad  results.  The  note  issue  became  so  inflated  in 
certain  cases  that  the  matter  became  rather  serious.  Those  are  the 
results  that  we  are  trying  to  avoid. 

Mr.  LOXGWORTH.  You  and  Secretary  McAdoo,  I  think,  both  used 
the  phrase  "  as  a  corollary  to  this  power"  you  ought  also  to  have  the 
power  to  supervise  and  refuse  to  license  the  issue  of  unnecessary 
securities? 

Mi-.  WARBURG.   Yes. 

Mr.  LONGWORTII.  You  ask  for  legal  authority  to  do  that  in  the  case 
of  all  private  corporations,  but  you  do  not  ask  for  that  in  the  case  of 
municipalities.  I  suppose  you  would  not  have  the  power  to  do  that 
in  the  case  of  municipalities? 

Mr.  WARBURG.  Congress  has  not  the  power  to  say  to  a  munici- 
pality, I  think,  that  they  shall  not  issue  securities,  but  we  can  catch 
them  when  it  comes  to  the  sale  of  securities.  A  State  could  sell 
direct  to  a  State  bank  $2,000.000  of  State  bonds,  and  we  could  not 
interfere,  but  when  the  State  bank  would  publicly  offer  those  se- 

43122—18 4 


50  WAR    FINANCE    CORPORATION. 

curities  lor  sale  to  the  public  we  can  interfere,  because  they  would 
have  to  have  a  license  to  do  that. 

Mr.  LONG  WORTH.  You  could  not  interfere  with  a  municipality 
offering  them  itself,  but  you  could  interfere  if  the  State  offered  them 
for  sale  through  bonding  agencies? 

Mr.  WARBURG.  Yes.  I  may  say  that  the  municipalities  appear 
quite  willing  to  cooperate  with  us,  and  they  are  very  grateful  where 
they  do  want  to  do  the  right  thing,  to  have  us  take  the  responsibility, 
where  they  themselves  might  sometimes  not  be  willing  to  do  it  unless 
we  stood  behind  them. 

Mr.  LONGWORTH.  Is  this  an  additional  argument  in  favor  of  the 
granting  of  power  to  extend  credit  to  deserving  corporations,  that 
many  of  them  will  be  very  short  of  cash  at  the  time  they  would  have 
to  pay  their  excess-profits  taxes  in  June? 

Mr.  WARBURG.  I  think  it  is  an  additional  argument  that  we  have 
entirely  abnormal  conditions.  The  mere  thought  that  over  $2.000.- 
000,000  of  taxes  are  due  in  June  and  have  to  be  paid  is  a  thing  so  abso- 
lutely unprecedented — that  in  itself  it  creates  apprehension  on  the 
part  of  a  great  many  corporations  that  they  might  be  unable  to 
finance,  and  that,  with  a  security  market  that  has  been  destroyed, 
brings  about  a  demand  for  an  organization  that  may  grant  extraor- 
dinary relief. 

Mr.  LONGWORTH.  I  have  always  felt  that  the  proper  relief  in  that 
case  was  to  postpone  the  payment  of  the  excess-profit  tax.  and  let  it 
be  paid  in  installments — say  running  six  months  after  the  1st  of 
July. 

Mr.  WARBURG.  I  think  that  would  be  a  very  happy  solution,  if 
the  law  were  so  amended  that  these  taxes  were  to  be  paid  in  in- 
stallments— four  times  a  year  instead  of  on  one  date.  But  I  do  not 
think  we  could  postpone  it  now,  because  the  Government  needs  the 
money.  This  year  we  would  have  to  proceed  as  the  law  now  pro- 
vides, but  after  that  I  thiak  it  would  be  a  very  good  thing  if  pro- 
vision were  made  that  these  payments  could  be  made  in  four  in- 
stallments instead  of  one.  because  $3,000,000,000  is  too  much  to  take 
out  at  one  time,  even  though  we  spread  the  loan  through  the  ad- 
vance sale  of  certificates. 

Mr.  LONGWORTH.  Do  you  think  it  advisable  to  give  the  Secretary 
of  the  Treasury  veto  power  over  every  act  of  this  corporation '( 

Mr.  WARBURG.  I  think  it  is — I  do  not  know  about  "  every  act." 

Mr.  LONGWORTH.  I  notice  the  words  "  with  the  approval  of  the  Sec- 
rotary  of  the  Treasury  "  occur  about  eighteen  times  in  the  bill.  In 
other  words,  the  directors  of  the  corporation  have  no  powers  what- 
ever which  are  not  subject  to  the  approval  of  the  Secretary  of  the 
Treasury. 

Mr.  WARBURG.  I  think  that  probably  it  would  be  better  for  you  to 
discuss  that  with  the  Secretary  of  the  Treasury  rather  than  with  me. 
But  I  should  like  to  say  this.  This  corporation  has  got  to  be  run  in 
absolutely  close  touch  with  the  Treasury  Department,  because  this 
corporation  competes  with  the  Treasury  in  the  sale  of  Government 
bonds.  The  five-year  notes,  or  the  two-year  notes,  or  the  one-year 
notes,  whatever  the  corporation  will  sell,  will  appeal  to  the  same 
market  as  the  Government  appeals  to  with  its  issues  of  bonds.  You 
could  imagine  if  there  were  two  absolutely  independent  bodies  in 


WAR   FINANCE   CORPORATION.  51 

charge  the  War  Finance  Corporation  might  preempt  the  field  of  the 
Secretary  of  the  Treasury. 

Again,  there  are  certain  transactions  which  are  being  carried  on 
by  the  War  Department  and  the  Navy  Department  making  advances 
on  contracts,  and  these  transactions  are  expected  to  go  into  this  corpo- 
ration. That  is  Government  business,  and  I  think  there  ought  to  be 
a  veto  power  in  the  Secretary  of  the  Treasury,  so  that  he  could  con- 
trol to  that  extent  and  harmonize  with  his  own  the  operations  of  the 
corporation. 

Mr.  HAWLKY.  If  a  municipal  corporation  offers  to  sell  an  issue  of 
bonds  that  you  have  not  approved,  and  a  bank  takes  them,  the  first 
control  you  have  is  that  it  can  not  sell  them  without  your  consent, 
and  then  the  second  is  that  if  the  bank  submits  them  as  security  for 
a  loan,  for  which  it  makes  a  request,  they  will  not  be  accepted  as 
security  for  that  loan.  Is  that  correct? 

Mr.  WARBURG.  No;  municipal  securities  are  not  admissible  any 
way  with  Federal  reserve  banks,  or  do  you  refer  to  the  War  Finance 
Corporation  ( 

Mr.  HAWLKY.  Yes;  I  understood  the  Secretary  of  the  Treasury 
to  so  state  to  the  Senate  committee,  but  I  was  not  clear  whether  the 
War  Finance  Corporation  would  refuse  to  any  bank  the  right  to 
accept  such  municipal  securities  and  hold  them  without  your  con- 
sent as  security  for  a  loan. 

Mr.  WARBURG.  I  have  no  doubt  it  would  do  that  because  the 
mere  fact  that  the  approval  would  be  withheld  would  show  that 
these  funds  are  being  raised  for  a  purpose  for  which  they  should 
not  be  raised  at  this  time. 

Mr.  HAWLKY.  So  that  you  have  absolute  control  over  municipal 
issues  in  that  way  ( 

Mr.  WARBURG.  We  would  if  the  law  passed — not  absolute,  because 
of  the  local  banks.  There  are  some  very  strong  local  banks  and  if 
they,  in  spite  of  our  sayso,  were  to  take  the  securities  and  hold 
them,  that,  of  course,  could  be  done. 

Mr.  HAWLKY.  But  they  could  not  take  very  large  quantities  of 
them  ? 

Mr.  WARBURG.  They  could  take  a  good  many  millions.  If  the 
local  bankers  wanted  to  take  in  two  or  three  year  notes  of  their 
respective  cities,  they  could  take  a  large  amount,  if  they  wanted, 
but  I  do  not  think  they  will.  I  do  not  expect  any  such  trouble. 

Mr.  HAWLKY.  Suppose  an  industrial  corporation  desired  to  issue 
a  quantity  of  bonds,  and  this  law  having  been  enacted,  it  proceeds 
in  this  way:  It  authorised  the  issue  of  a  block  of  bonds  this  month, 
sav  of  $50,000,  and  the  next  month  $75,000,  and  the  month  subsequent 
S(l'( ).()(•().  and  so  on  in  successive  periods,  offering  them  in  small  blocks, 
not  at  anv  time  equal  to  $100.000.  and  a  number  of  corporations 
should  do  that?  They  might  offer  for  sale  outside  the  provisions  of 
the  law  a  large  amount  of  securities.  What  would  you  do  in  such 
a  case  as  that  ( 

Mr.  WARBURG.  We  would  show  them  up.  I  think  that  is  all  we 
could  do.  I  think  they  could  do  it.  but  if  you  went  further  than 
that  in  the  law  you  would  block  the  business  of  the  country. 

Mr.  HAWLKY.  You  have  considered  the  possibilities  of  preventing 
by  some  administrative  method  the  sale  of  unnecessary  bonds  in 
small  blocks? 


52  WAR    FINANCE    CORPORATION. 

Mr.  WARBURG.  Yes;  that  can  be  done. 

Mr.  HULL.  On  the  question  of  State  and  municipal  securities,  the 
act  only  authorizes  the  board  to  prohibit  the  sale  or  offering  for  sale. 
It  does  not  prohibit  the  purchase  of  them.  If  it  was  desired  to  abso- 
lutely control  the  floating  of  State  and  municipal  securities,  the  act 
could  authorize  the  board  to  prohibit  the  purchase  of  them,  could  it 
not? 

Mr.  WARBURG.  I  think  it  might.  I  am  not  a  lawyer  and  I  do  not 
want  to  pass  on  that.  It  looks  to  me  as  if  it  could. 

Mr.  HULL.  The  other  laws  in  most  of  fhe  other  countries  do  go 
that  far,  do  they  not? 

Mr.  ^  ARBURG.  I  do  not  think  so.  The  laws  provide  that  the  issu- 
ance houses  have  got  to  have  the  approval  of  their  prospectuses  and 
the  control  is  most  of  the  time  through  the  stock  exchange,  and  no 
stock  exchange  is  permitted  to  give  a  quotation  until  the  prospectus 
has  been  approved.  I  do  not  think  any  country  puts  an  innocent 
purchaser  of  securities  on  notice.  Personally.  I  think  that  is  going 
too  far. 

Mr.  HULL.  Almost  every  country  at  war  imposes  that  strict  restric- 
tion on  the  issue  of  securities? 

Mr.  WARBURG.  Yes:  they  do. 

Mr.  HULL.  Except  this  one? 

Mr.  WARBURG.  Yes. 

Mr.  HULL.  It  seems  necessary  that  this  country  should  do  like- 
wise ( 

Mr.  WARBURG.  I  think  so. 

Mr.  HULL.  Speaking  about  the  Federal  Reserve  System  taking  over 
these  functions,  the  only  two  places  in  the  bill  I  have  noticed  where. 
by  implication,  the  Federal  reserve  act  is  amended  are  on  pages  10 
and  11.  if  you  will  turn  to  those  two  pages.  Line  16,  on  page  10.  is 
the  first  amendment,  and  beginning  with  line  il.  on  page  11.  is  the 
second ;  is  that  correct  ? 

Mr..  WARBURG.  I  think  that  is  the  only  reference  in  the  bill. 

Mr.  HULL.  Those  are  the  only  two  provisions  in  this  bill  which, 
by  implication,  amend  the  Federal  reserve  act? 

Mr.  WARBURG.  That  is  correct. 

Mr.  HULL.  There  has  been  quite  a  little  discussion  and  comment  on 
the  fact  that  England  has  no  law  regulating  the  issue  of  securitie-. 
I  notice  that  Germany  and  France  have  express  legal  provisions  on 
that  subject,  and  that  Canada  has  what  is  equivalent  to  one — an 
Order  in  Council — which  is  very  comprehensive.  If  I  understand 
you  correctly,  the  stock  exchange  in  London,  which  was  closed  at 
the  outbreak  of  the  war.  would  not  and  could  not  undertake  to  reopen 
without  the  permission  or  the  consent  of  the  British  treasury.  Is 
that  correct? 

Mr.  WARBURG.  That  is  correct. 

Mr.  HULL.  And  before  they  would  agree  to  the  reopening  of  the 
stock  exchange  they  imposed  certain  restrictions  on  the  operations 
of  the  exchange  relating  to  the  sale  of  securities,  which  the  exchange 
agreed  to  abide  by. 

Mr.  WARBURG.  They  did. 

Mr.  HULL.  They  prohibited  the  selling  of  any  securities  which  the 
securities  committee  of  the  British  Government  imposed  restrictions 
on? 


WAR   FINANCE    CORPORATION.  53 

Mr.  WAKBUIUJ.  That  is  right. 

Mr.  HULL.  I  notice  there  are  a  few  legal  provisions  here  in  the 
compilation  of  emergency  war  legislation  in  England,  which  in  part 
expressly  authorize  the  prohibition  of  these  security  issues,  so  that 
in  addition  to  this  condition,  which  is  equivalent  to  authority  of  law 
in  relation  to  the  operation  of  the  stock  exchange,  there  are  two  or 
three  statutes  which  enforce  entire  prohibition  of  security  issues,  if 
necessary,  as  it  relates  to  certain  classes  of  business. 

Mr.  WAKBURG.  That  is  correct. 

Mr.  HULL.  Under  this  system  of  regulating  issues  of  securities, 
local  or  district  or  State  boards  who  have  local  knowledge  of  the  con- 
ditions relating  to  each  kind  of  business  that  might  make  a  special 
application,  the  general  board  here  would  prescribe  the  rule  of 
poiicy,  and  the  chief  work  of  ascertaining  the  true  facts  and  making 
recommendations  would  devolve  on  these  local  organizations,  would 
it  not? 

Mr.  WARBURG.  Yes.  The  local  organizations  investigate  the  mat- 
ter on  its  merits,  and  particularly  as  to  the  statement  of  the  facts, 
and  when  they  make  their  recommendations,  unless  we  have  an  abso- 
lutely clear  case  which  we  decide  without  submitting  it  to  the  local 
organizations.  There  are  some  cases  which  are  absolutely  clear. 
But  wherever  a  local  investigation  is  necessary,  that  is  being  done  by 
the  local  organization. 

Mr.  HULL.  I  do  not  know  whether  this  is  a  difference  in  figures  or 
a  difference  in  rule.  On  page  0.  line  14,  the  bill  provides: 

Ami  proridcd.  That  any  advances  so  insult'  by  the  corporation  in  cast's  where 
such  financial  assistance  shall  have  been  rendered  by  the  purchase  of  such  bonds 
or  other  obligations  shall  not  exceed  75  per  cent  of  the  market  value  of  such 
bonds  or  other  obligations  at  the  time  of  such  advance,  as  estimated  and  deter- 
mined by  the  board  of  directors  of  the  corporation. 

Then  on  page  7,  it  is  provided  that  the  corporation  may  make  ad- 
vances up  to  one  hundred  per  cent,  under  certain  conditions.  On 
page  0,  the  power  to  make  advances  to  the  extent  of  75  per  cent  makes 
a  ratio  of  the  securities  to  the  advance  of  133  per  cent? 

Mr.  AYARBUUG.  That  is  right. 

Mr.  HULL.  And  the  ratio,  according  to  the  figures  on  the  next  page 
is  only  1^5  per  cent.  AA'as  it  intended  that  there  should  be  a  variance 
of  that  kind  ? 

Mr.  AATARBURG.  I  do  not  think  so.  That  is  a  little  inconsistency 
there  which  we  have  found,  and  it  ought  to  be  adjusted.  It  ought  to 
be  the  same  in  both  cases.  That  is  not  an  intentional  variance.  AYe 
discovered  it. 

Mr.  HULL.  In  reference  to  the  question  of  inflation,  which  has  been 
spoken  of.  would  you  mind  telling  us  to  what  extent,  if  any.  we  have 
hurtful  inflation  in  this  country  that  is  not  necessary,  inflation  under 
existing  conditions,  and  what  the  principal  factors  of  it  are? 

Mr.  WARBCTKJ.  Inflation  is  a  very  big  word;  it  is  used  with  respect 
to  the  expansion  we  are  having  just  now. 

Talking  about  the  matter  in  hand  here.  I  should  say  you  want  to 
differentiate  between  credit  inflation  and  currency  inflation.  As  far 
as  currency  inflation  is  concerned,  we  are  very  far  from  it.  We  have 
a  gold  cover  of  67  per  cent,  which  is  more  than  any  other  similar  sys- 
tem in  any  other  country,  even  before  the  beginning  of  the  war.  and 
so  we  are  far  from  a  currency  inflation. 


54  WAR   FINANCE   CORPORATION. 

As  far  as  credit  inflation  is  concerned,  that  is  a  phenomenon  which 
exists  all  the  world  over,  and  it  exists  with  us,  too.  It  can  not  be 
avoided.  If  a  Government  issues  billions  of  credit  instruments  for 
tilings  that  have  no  lasting  value  and  puts  them  out,  thus  creating 
credits  in  banks,  or  creating  bearer  obligations,  that  automatically 
dislocates  the  proper  proportion  that  existed  before  the  war  between 
the  value  of  goods  and  the  value  of  the  dollar — and  as  we  all  know, 
the  value  of  the  dollar  has  gone  down  about  50  per  cent — and  I  will 
not  quote  to  what  per  cent  the  purchasing  power  of  the  ruble  or 
other  currencies  in  other  countries  went  down — that  is  a  world  phe- 
nomeon  which  we  can  not  avoid. 

As  far  as  our  own  problem  is  concerned,  how  far  we  are  going  to 
inflate  and  possibly  will  get  a  currency  inflation  does  not  depend 
upon  the  Federal  reserve  banks,  does  not  depend  upon  what  you  are 
doing  to-day;  it  depends  solely  upon  two  factors.  One  is  the  amount 
of  money  the  Government  spends  and  the  other  the  amount  of  monev 
the  people  are  willing  to  save.  The  expenditure  of  the  Government 
is  beyond  our  control,  but  the  amount  of  money  that  the  people 
can  save  is  not  beyond  our  control;  at  least,  we  are  trying  all  we 
can  to  bring  about  a  greater  saving  of  material,  men,  and  available 
funds  and  credit. 

That  is  one  of  the  reasons  why  we  are  so  keen  on  controlling  the 
issue  of  securities,  to  prevent  wasteful  issue  of  securities  at  this 
time.  What  ever  the  people  will  not  save  and  whatever  the  Gov- 
ernment expends  in  excess  of  the  savings  of  the  people  has  to  be 
provided  somehow,  and  it  has  got  to  be  provided  by  an  expansion 
of  bank  credits  and  note  circulation.  We  have  no  excessive  note- 
circulation  expansion,  but  the  expansion  of  credit  affects  our  reserve 
proposition,  of  course.  Therefore  I  think  whatever  we  can  do  to 
bring  about  an  increase  in  the  will  to  save  and  the  power  to  save  by 
the  people  is  of  much  greater  importance  than  is  generally  realized  at 
this  time.  I  think  it  is  one  of  our  main  duties  at  this  time  to  bring 
that  about. 

Mr.  HULL.  To  what  extent  is  credit  inflation  now  responsible  for 
high  prices,  so  called,  and  to  what  extent  is  the  diminished  production 
a  necessary  part  of  it?  I  only  have  in  mind  the  effect  of  this  bill 
on  the  policies  of  the  Government,  but  I  bring  in  the  other  viewpoint 
in  order  to  get  a  relative  view. 

Mr.  WARBURG.  I  think  they  both  go  together,  but  that  is  a  ques- 
tion upon  which  you  can  get  all  the  professors  in  the  ITnited  States 
together  around  a  table,  and  they  will  all  disagree.  I  think  the  in- 
creased demand  for  goods  is  the  thing  that  starts  the  movement 
toward  higher  prices,  and  the  existence  of  higher  prices  brings  about 
the  necessity  of  creating  larger  issues  of  bonds,  because  you  have  to 
issue  so  many  dollars  for  everything  you  buy  at  a  higher  price.  On 
the  other  hand,  large  issues  of  Government  obligations  bring  about  a 
further  decrease  of  the  purchasing  power  of  the  dollar;  and  so  one 
thing  pulls  along  the  other,  and  that  is  why  it  is  important  to  fix 
prices — to  prevent  their  running  away  entirely. 

But  the  difficulty  is  that  we  are  not  independent ;  the  United  States 
alone  can  not  quite  emancipate  itself  in  that  respect.  The  demands 
are  world-wide,  and  we  are  tied  together  with  other  nations  in  this 
respect,  and  when  they  issue  securities  or  currency  against  bread  or 


WAR   FINANCE   CORPORATION.  55 

powder,  or  whatever  it  may  be,  it  necessarily  affects  our  prices  at 
home,  too. 

What  we  are  doing  here — this  creation  of  the  War  Finance  Cor- 
porjttion  has  very  little  to  do  with  the  whole  problem.  The  whole 
problem  is  ultimately  decided  by  what  is  being  saved,  and  what  is 
being  spent,  and  the  difference 'will  have  to  be  made  up  anyway, 
whether  it  is  through  Government  issues  or  through  War  Finance 
Corporation  issues. 

Mr.  HULL.  It  is  proposed  in  floating  the  bonds  of  this  corporation 
to  keep  the  interest  level.  I  suppos'e,  on  a  similar  basis  to  that  of 
other  Federal  securities;  that  is.  the  War  Finance  Corporation  would 
not  undertake  to  pay  higher  rates  of  interest  than  would  be  charged 
on  our  Liberty  fours,  for  illustration? 

Mr.  WARBURG.  I  do  not  think  you  could  quite  compare  them,  be- 
cause the  ones  are  25  and  30  year  bonds  and  the  others  are  1  to  5 
year  notes,  and  there  would  always  be  a  different  basis  for  those.  At 
times  they  may  be  offered  on  a  higher  basis  and  at  times  on  a  lower 
basis. 

Mr.  HULL.  These  notes  would  be  issued  at  par? 

Mr.  WARBURG.  Yes:  the  law  provides  that. 

Mi-.  HULL.  This  authority  proposed  here  allows  the  corporation 
to  purchase  and  sell  United  States  obligations.  Do  you  not  think 
it  would  have  been  better  to  have  left  out  the  other  securities  of  the 
Government  existing  prior  to  these  war  issues  and  limited  that  to  the 
Liberty  fours  and  the  converted  three  and  one-halfs  and  the  cer- 
tificates? 

Mr.  WARBURG.  You  mean  to  exclude  all  issues  we  put  out  before 
the  beginning  of  the  war? 

Mr.  HULL.  Those  for  which  circulation  prevailed. 

Mi-.  WARBURG.  Those  you  can  leave  out  entirely. 

Mr.  HULL.  This  provision  would  indicate  to  the  public  that  the 
corporation  would  be  as  ready  to  go  on  the  market  and  purchase 
one  as  the  other. 

Mr.  WARBURG.  I  do  not  think  that  is  the  intention  of  the  Secretary. 
I  think  he  will  be  willing  to  strike  that  out.  He  has  in  mind  to  pro- 
tect the  market  of  the  new  issues,  which  is  now  without  protection. 

Mr.  SLOAN.  I  would  like  to  ask  if  it  is  not  designed  to  ultimately 
control  the  credits  issued  and  the  ones  that  are  to  be  granted  by  the 
members  of  the  Federal  reserve  banks  ? 

Mr.  WARBURG.  No. 

Mr.  SLOAN.  Not  to  be  controlled? 

Mr.  WARBURG.  I  do  not  think  so. 

Mr.  SLOAN.  Is  not  one  of  the  purposes  of  this  legislation  to  bring 
in  and  coordinate  with  the  credit-loaning  power  of  the  Federal 
reserve  banks  the  State  banks  and  the  savings  banks  ? 

Mr.  WARBURG.  You  mean  whether  that  is  the  plan  of  this  legisla- 
tion ? 

Mr.  SLOAN.  Yes. 

Mr.  WARBURG.  No ;  I  do  not  think  so. 

Mr.  SLOAN.  It  is  not  intended  in  anywise  to  control  the  loaning 
power  or  the  credit-granting  power  of  State  banks,  savings  banks,  or 
Federal  reserve  banks? 

Mr.  WARBURG.  I  do  not  think  this  is  any  instrument  of  control 
at  all. 


56  WAR    FINANCE    CORPORATION. 

Mr.  SLOAN.  Will  it  not  ultimately  have  the  effect  of  to  some  extent 
hampering  all  large  new  investment  enterprises? 

Mr.  WARBURG.  That  depends  upon  what  view  you  take  of  the 
money  market.  If  you  take  the  view  that  we  are  going  to  get  into 
such  a  condition  that  nothing  will  sell  except  Government  securities, 
then,  of  course,  we  would  approach  a  condition  where  this  corpora- 
tion would  exercise  a  very  important  control.  But  that  is  not  the 
condition  to-day. 

Mr.  SLOAN.  Granted  the  passage  of  this  act.  would  it  not  be  one 
of  the  first  questions  of  the  organizers  of  an  enterprise,  or  those 
who  would  obtain  loans,  to  find  out  what  the  attitude  of  the  banks 
would  be,  and  would  not  the  attitude  of  the  banks  in  granting  that 
loan  depend  a  good  deal  on  the  attitude  of  this  new  organization? 

Mr.  WARBURG.  Only  to  the  extent  that  they  could  not  float  it  with- 
out the  assistance  of  this  corporation.  I  think  their  first  question 
would  be,  Are  we  dealing  with  a  proposition  we  can  sell  without 
going  to  that  corporation?  And  if  they  can  do  it.  as  T  hope  they 
will,  then  they  will  be  independent.  This  corporation  ought  to  do 
everything  in  its  power  to  leave  in  its  natural  channels  whatever  will 
float  on  its  own  bottom. 

Mr.  SLOAN.  It  is  taking  care  of  the  large  surplus.  All  that  is  in 
the  twilight  zone,  and  such  a  new  enterprise  would  become  more  or 
less  subject  to  the  will  and  judgment  of  the  new  Government  cor- 
poration, would  it  not? 

Mr.  WARBURG.  Whatever  could  not  float  on  its  own  bottom  would 
become  subject,  I  think,  primarily,  to  the  banks  of  the  district,  and 
whatever  the  banks  could  not  float,  would  come  to  the  War  Finance 
Corporation. 

Mr.  SLOAN.  The  whole  purpose  of  this  proposition  is  it  not.  is  to 
mobolize  the  ultimate  large  credits  of  the  country  and  put  them  in 
control  of  the  new  corporation  ( 

Mr.  WARBURG.  I  do  not  think  you  put  them  in  control,  but  you 
place  the  loaning  power  of  this  corporation  at  their  disposal. 

Mr.  SLOAN.  Disposal,  ordinarily,  would  mean  a  large  measure  of 
control,  would  it  not? 

Mr.  WARBURG.  It  would,  but  in  this  case  the  effect  ought  to  be 
different. 

There  is  no  intention  of  granting  any  control,  but  quite  the  con- 
trary. I  think  what  this  bill  ought  to  do  is  to  enable  the  banks  to 
go  on  doing  business,  and  not  either  force  the  country  to  stop  doing 
business,  or  to  bring  them  into  direct  dependence. 

Mr.  SLOAN.  If  that  is  true,  why  not  draft  a  bill  that  would  leave 
it  all  in  the  Federal  reserve  banks,  with  such  amendments  as  might 
be  necessary?  I  believe  you  have  already  gone  over  that  proposi- 
tion pretty  thoroughly. 

Mr.  WARBURG.  That  would  have  a  very  unfortunate  effect.  I  think 
we  can  not  deny  that  this  is  a  proposition  that  In  normal  times  no 
one  of  us  would  like.  But  no  one  of  us  likes  the  present  condition. 
But  taking  it  all  in  all,  and  taking  the  necessities  of  the  case,  I  think 
this  is  the  best  means  to  meet  the  present  situation. 

Mr.  SLOAN.  Notwithstanding  it  is  not  based  upon  the  credit  either 
of  the  reserve  banks,  or  the  other  banks,  still  you  think  it  would  be 
well  to  leave  it  in  control  of  a  board  to  be  headed  by  the  Secretary 
of  the  Treasury,  who  has  already  several  functions  to  perform?  You 


WAR    F1NANCK    CORPORATION.  57 

think  it  is  wise  to  create  a  new   function  for  the  Secretary  of  the 
Treasury  and  leave  him  at  the  head  of  the  corporation? 

.Mr.  WAIMH  RG.  I  think  it  is  imperative  to  do  it  in  this  case.  Of 
course,  the  way  the  tiling  would  work  out  would  be  for  him  to  draw 
together  the  ablest  men  he  could  get.  He  would  have  to  find  the  best 
possible  manager  to  take  full  charge  of  if,  with  a  board  of  able  men 
around  him.  and  get  the  local  committees  built  up  so  that  each  of 
these  propositions  would  be  handled  on  its  own  merit  before  it  came 
to  him.  and  the  scrutiny  and  approval  of  the  local  branches  that 
would  be  required  would  act  as  a  strong  element  in  the  sifting  process. 

Mr.  SLOAN.  For  that  reason  would  it  not  seem  more  important, 
and  would  it  not  inspire  confidence  throughout  to  have  the  largest 
banker  and  the  largest  business  man,  in  ability,  at  the  head  of  the 
institution,  rather  than  the  natural  head  of  the  Reserve  bank  system? 
And  when  I  say  that.  I  do  not  mean  to  reflect  on  anybody,  having 
the  utmost  admiration  for  the  ability  of  the  present  head  of  the. 
Treasury  Department. 

Mr.  WABBCBG.  The  operations  of  the  Go\  eminent  and  this  cor- 
poration are  so  closely  linked  that  it  would  be  impossible  to  turn 
this  corporation  over  to  an  independent  body.  That  could  not  be 
done. 

Mr.  SLOAN.  It  occurred  to  me  that  if  it  was  so  close  to  the  (io\ em- 
inent it  ought  to  be  made  closer,  and  that  that  could  be  done  by  t he- 
adoption  of  an  amendment  to  the  act  in  reference  to  the  Federal 
reserve-bank  system,  rather  than  have  the  so-called  independent  or- 
iranization.  which  would  still  not  be  independent. 

Mr.  HKLVEUING.  Mr.  Warburg,  will  you  cite,  for  the  record,  two 
examples  of  a  probable  situation,  one  where,  commercially,  the  favor 
can  not  be  extended,  which  you  would  approve,  and  the  other  where 
the  favor,  commercially,  would  be  extended  to  investors,  but  which 
you  would  disapprove? 

A  great  many  members  have  asked  why  it  was,  with  practically 
the  -ame  proposition,  there  is  one  that  commercially  can  not  be  ap- 
proved, and  on  the  other  hand  one  that  was  not  sound  would  be  ap- 
proved: that  is.  with  reference  to  the  conduct  of  the  war. 

Mr.  WAKJU  i;<;.  The  point  of  view  as  to  whether  a  thing  is  com- 
patible with  public  interest:  that  is  what  you  wanted  me  to  explain? 

Mr.  HKI.VKIUNG.   Yes. 

Mr.  \V.u;m  K<;.  That  is  a  hard  question,  as  a  question  of  theory. 
It  is  very  difficult  to  draw  that  line  between  what  is  essential  and 
what  is  an  unessential  thing  at  this  time. 

There  are  certain  things  concerning  which  it  is  clear  that  they  can 
be  postponed.  Other  things  are  on  the  border  line,  and  there  we 
have  to  deal  with  a  good  deal  of  discretion.  What  we  do  in  those 
cases  is  this:  We  go  to  the  departments  and  find  out  how  much  they 
want  a  certain  service.  For  instance,  if  it  is  a  question  of  roads,  we 
consult  with  the  Department  of  Agriculture,  and  if  it  is  a  question 
in  connection  with  reference  to  irrigation,  or  if  it  is  a  drainage  prop- 
osition, or  if  it  is  a  question  of  oil.  we  go  to  the  Department  of  the 
Interior,  and  we  find  out  how  much  there  is  of  the  present  capacity 
being  used  or  how  nearly  existing  plants  are  run  to  capacity,  and  we 
are  guided  by  those  facts'. 

There  may  be  a  perfectly  good  commercial  proposition.  For 
instance,  a  man  may  be  making  artificial  Mowers,  and  he  may  be 


58  WAR   FINANCE   CORPOKATION. 

making  100  per  cent  on  his  money.  If  he  wanted  to  sell  an  issue  of 
$1,000,000  worth  of  notes  and  asked  us  at  this  time  to  approve  of 
that  issue,  we  would  say  no;  the  country  does  not  need  artificial 
flowers  at  this  time.  That  is  the  only  point  of  view  we  have  to  con- 
sider at  the  capital  issue  committee  at  the  present  time. 

The  other  thing  you  mentioned  is  a  question  that  may  come  before 
the  War  Finance  Corporation.  It  does  not  touch  our  committee  be- 
cause we  have  not  gone  into  the  commercial  value  of  things  so  far. 
That  is  a  question  that  will  be  dealt  with  by  the  War  Finance  Cor- 
poration and  is  a  very  important  thing. 

Suppose  it  is  a  question  of  a  power  plant  that  has  to  produce 
power  for  certain  manufacturing  processes  directly  connected  with 
the  war.  Banks  may  be  unwilling  to  finance  that  because  the  contract 
may  be  such  that  they  may  have  doubts  as  to  what  will  happen  to 
the  plant  when  the  war  is  over.  I  should  think  those  are  decidedly 
propositions  banks  would  not  entertain  on  their  commercial  values. 
while  the  War  Finance  Corporation  would  have  to  consider  very 
seriously  the  question  of  public  interests. 

Mr.  LONGWORTH.  Why  might  it  not  be  a  good  idea  to  increase  the 
size  of  this  board  of  directors  and  put  on  it  a  representative  of  the 
Army,  of  the  Navy,  of  the  Fuel  Administration,  and  of  the  priorities 
board,  so  that  you  would  not  have  to  go  in  each  instance  to  a  certain 
department,  but  would  always  have  sitting  on  the  board  a  repre- 
sentative of  that  particular  department? 

Mr.  WARBURG.  Quite  frankly,  that  Avas  discussed,  and  I  think  the 
first  draft  of  the  bill  proceeded  on  those  lines.  Do  you  not  think 
experience  has  told  us  that  there  is  a  great  danger  of  delay  in  every- 
thing the  Government  wants  to  do,  and  has  to  do,  and  that  the  danger 
is  altogether  with  the  great  size  of  the  country  and  with  our  political 
construction,  that  we  may  always  be  some  months  too  late. 

Mr.  LONGWORTH.  Would  not  that  have  a  tendency  to  hurry  them 
up? 

Mr.  WARBURG.  I  do  not  think  so.  The  difficulty  is  that  a  man 
representing  a  department  would  not  have  at  his  fingers'  ends  all 
those  details.  The  departments  are  so  large  that  if  it  were  a  question 
of  building  a  trolley,  for  instance,  from  one  place  to  another,  that 
particular  man  would  probably  not  know  about  it.  Then,  his  being 
on  the  board  would  keep  out  other  men  who  are  much  more  impor- 
tant: that  is,  men  who  have  commercial  training  and  banking 
training. 

I  find  that  with  our  present  modus  operand!  it  is  not  difficult  for 
us  to  get  from  the  departments  all  the  information  we  want.  They 
get  it  out  for  us  very  rapidly.  It  would  be  difficult  for  them  to  dele- 
gate a  man  whose  time  could  be  given  entirely,  because  the  War 
Finance  Corporation  is  likely  to  sit  all  day,  from  9  o'clock  in  the 
morning  until  late  in  the  evening,  and  a  man  on  that  board  would 
soon  be  out  of  touch  with  what  is  happening  in  his  own  department* 
anyway. 

Then,  too,  he  would  not  have  the  qualifications  you  really  need. 
He  would  not  have  the  qualifications  of  a  well-trained  and  fast-work- 
ing business  man  or  banker  who  will  deal  with  these  matters  without 
much  red  tape,  as  he  has  got  to  do  in  order  to  get  results. 

While  I  am  fully  alive  to  the  thought  that  prompts  that  question,  I 
believe  that  a  corporation  of  this  kind,  to  do  effective  work,  must 


WAR   FINANCE   CORPORATION.  59 

have  centralized  authority  to  work  in  a  businesslike  way.  and  work 
quickly. 

Mr.  TREADWAY.  What  methods  have  not  been  satisfactory  in  the 
control  of  the  new  securities  in  the  British  system  ? 

Mr.  WARBURG.  I  think  they  have  been  entirely  satisfactory. 

Mr.  TREADWAY.  I  understood  you  to  say  they  were  not  satisfactory, 
and  you  did  not  wish  to  encourage  that  method  under  the  Federal 
reserve  act.  There  have  been  one  or  two  questions  as  to  whether 
or  not  this  permission  could  not  be  given  to  the  Federal  Reserve 
Board,  following  along  the  line  of  the  concentration  of  war  power. 

Mr.  WARBURG.  As  Judge  Hull  said,  the  British  have  some  powers 
behind  the  voluntary  organization.  There  is  a  big  stick  somewhere. 

Mi-.  TREADWAY.  It  does  not  appear  actually  in  the  law? 

Mr.  WARBURG.  No:  it  does  not.  and  I  think  if  we  could  get  a  big 
stick,  some  power  to  put  the  force  of  law  behind  us.  we  could  proceed 
substantially  in  the  manner  as  we  are  doing  now. 

Mr.  TRKADWAY.  That  is,  under  the  Federal  Reserve  Board  ( 

Mr.  WARBURG.  As  far  as  licensing  goes. 

Mr.  TREADWAY.  But  there  is  such  a  distinction  between  the  two 
classes  of  securities — liquid  assets  and  the  actual  stocks  and  bonds — 
that  the  two  can  not  be  harmonized  sufficiently  to  be  under  one  juris- 
diction ( 

Mr.  WARBURG.  So  far  as  actual  business  concerns  are  concerned 
the  corporation  is  going  to  make  advances  on  securities  for  five  years. 

Mr.  WHITE.  You  stated  that  your  capital  issues  committee  had  a 
minimum  of  $250,000  for  permission  for  issue. 

Mr.  WARBURG.  On  municipalities,  and  $500,000  for  corporations  of 
other  character. 

Mr.  AViiiTK.  My  question  is.  Would  not  that  interfere  less  with 
the  normal  activities  of  business  than  the  $100.000  minimum,  and 
be  just  as  well  to  put  in  this  bill? 

Mr.  WARBURG.  It  would  interfere  less,  and  therefore  would  also  be 
less  efficient.  You  can  not  bring  about  the  results  you  want  to  bring 
about  by  leaving  the  people  alone.  I  think  our  committee  will  prob- 
ably reduce  its  limits  very  soon.  We  have  been  discussing  it  very 
seriously,  and  we  are  very  clear  that  the  municipal  issues  should  go 
down  to  $100.000,  and  as  to  the  industrial  issues,  that  they  should 
go  to  $250,000.  It  means  a  great  many  applications,  and  we  do  not 
want  to  go  faster  than  we  are  certain  we  can  dispose  of  them.  We 
do  not  want  to  keep  them  waiting  for  a  fortnight  or  three  weeks,  and 
let  business  come  to  a  halt  because  we  can  not  handle  the  applications, 
so  we  are  proceeding  slowly.  This  corporation  has  the  power  to  issue 
regulations. 

Mr.  TRKADWAY.  Is  that  power  which  your  committee  is  now  exer- 
cising similar  to  the  power  exercised  by  the  British  Government? 

Mr.  WARBURG.  Exactly  the  same. 

Mr.  TREADWAY.  The  only  difference  is  that  you  have  to  deal  with 
it  in  larger  increments  than  they  do  over  there? 

Mi.  WARBURG.  Yes. 

Mr.  TREADWAY.  The  work  of  your  committee  is  now  practically  the 
same  as  the  general  system  in  England  ? 

Mr.  WARBURG.  That  is  correct. 


60  \VAK    FINANCE    COBPORATION. 

Air.  HULL.  On  page  12,  line  19,  the  bill  says : 

Any  securities,  which  upon  the  date  of  the  approval  or  control  of,  or  have 
been  hypothecated  by  the  corporation,  association,  or  obligor  issuing  the  same, 
shall  not  be  deemed  to  have  been  issued  prior  to  the  date  of  the  approval  of  this 
act  within  the  meaning  hereof. 

Is  that  not  intended  to  interfere  with  the  sale  of  collateral? 

Air.  WARBURG.  No. 

Air.  HULL.  On  page  (>.  line  11,  that  limits  the  advances  to  bonds 
or  other  obligations.  If  a  concern  had  a  large  amount  of  stock  which 
it  held  in  another  concern,  it  could  not  have  any  recognition  under 
this  provision  on  the  stock  item,  even  though  that  should  be  the  only 
security  it  had  to  offer  ? 

Air.  WARBURG.  It  says,  "  to  any  banks,  bankers,  or  trust  company 
which  has  rendered  financial  assistance,  directly  or  indirectly,  to 
any  such  person,  firm,  corporation,  or  association  by  the  purchase  of 
its  bonds  or  other  obligations.''  That  means  if  a  syndicate  has 
bought  bonds  or  obligations;  I  do  not  think  you  want  to  advance  on 
stocks. 

Mr.  HULL.  Their  stock  is  intended  to  be  excluded  there  ? 

Air.  WARBURG.  Their  stock  is  intended  to  be  excluded  there ;  yes. 

(Thereupon  the  committee  adjourned  to  meet  to-morrow,  Wednes- 
day. February  20,  1918,  at  10  o'clock  a-  m.) 


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